PSYCHOLOGY 

OF  THE 

STOCK  MARKET 


By  G.  C.  Selden 


Author  of  "  Trade  Cycles,"  "  What  Makes  the  Market  ? ' 
Etc 


TICKER   PUBLISHING    COMPANY 


2    RECTOR    STREET 
NEW  YORK 


PREFACE 

THIS  book  is  based  upon  the  belief  that  the 
movements  of  prices  on  the  exchanges 
are  dependent  to  a  very  large  degree  on  the 
mental  attitude  of  the  investing  and  trading 
public.  It  is  the  result  of  years  of  study  and 
experience  as  fellow  at  Columbia  University, 
news  writer,  statistician,  on  the  editorial  staff 
of  THE  MAGAZINE  OF  WALL  STREET,  etc. 

The  book  is  intended  chiefly  as  a  practical 
help  to  that  considerable  part  of  the  com- 
munity which  is  interested,  directly  or  in- 
directly, in  the  markets ;  but  it  is  hoped  that  it 
may  also  have  some  scientific  value  as  a  pre- 
liminary discussion  in  a  new  field,  where  op- 
portunities for  further  research  seem  almost 
unlimited.  G.  C.  SELDEN. 

New  York,  May  28,  1912. 


^59783 


Copyright  1912 
Ticker  Publishing  Company 


CONTENTS. 


I.    The  Speculative  Cycle  ..........       9 

II.  Inverted  Reasoning  and  Its  Con- 

sequences   .................     27 

III.  "They"    .......................     39 

IV.  Confusing  the  Present  with  the 

Future  —  Discounting  ........     55 

fS 

V.     Confusing  the  Personal  with  the 

General    ....................     71 

VI.    The  Panic  and  the  Boom  ......     87 

VII.    The  Psychology  of  Scale  Orders  101 

VIII.    The     Mental    Attitude     of    the 

Individual  .  .   109  ^ 


I— The  Speculative  Cycle 

MOST  experienced  professional 
traders  in  the  stock  market  will 
readily  admit  that  the  minor 
fluctuations,  amounting  to  perhaps  five 
or  ten  dollars  a  share  in  the  active 
speculative  issues,  are  chiefly  psycho- 
logical. They  result  from  varying  atti- 
tudes of  the  public  mind,  or,  more 
strictly,  from  the  mental  attitudes  of 
those  persons  who  are  interested  in  the 
market  at  the  time. 

Such  flucluations  may  be,  and  often 
are,  based  on  "fundamental"  condi- 
tions— that  is,  on  real  changes  in  the 
dividend  prospects  of  the  stocks  af- 
fected or  on  variations  in  the  earning 
power  of  the  corporations  represented 
— and  again  they  may  not.  The  broad 
movements  of  the  market,  covering 
periods  of  months  or  even  years,  are 
always  the  result  of  general  financial 


10  THE   PSYCHOLOGY   OF 

conditions;  but  the  smaller  intermedi- 
ate fluctuations  represent  changes  in 
the  state  of  the  public  mind,  which 
may  or  may  not  coincide  with  altera- 
tions in  basic  factors. 

To  bring  out  clearly  the  degree  to 
which  psychology  enters  into  the  stock 
market  problem  from  day  to  day,  it  is 
only  necessary  to  reproduce  a  conver- 
sation between  professional  traders 
such  as  may  be  heard  almost  any  day 
in  New  street  or  in  the  neighboring 
cafes. 

"Well,  what  do  you  know?"  says  one 
trader  to  the  other. 

"Just  covered  my  Steel,"  is  the  reply. 
"Too  much  company.  Everybody 
seems  to  be  short." 

"Everybody  I've  seen  thinks  just  as 
you  do.  Each  one  has  covered  be- 
cause he  thinks  everybody  else  is  short 
— still  the  market  doesn't  rally  much. 
I  don't  believe  there's  much  short  in- 
terest left,  and  if  that's  the  case  we 
shall  get  another  break." 

"Yes,  that's  what  they  all  say — and 


THE    STOCK    MARKET.  11 

they've  all  sold  short  again  because 
they  think  everybody  else  has  covered. 
I  believe  there's  just  as  much  short 
interest  now  as  there  was  before." 

It  is  evident  that  this  series  of  inver- 
sions might  be  continued  indefinitely. 
These  alert  mental  acrobats  are  doing 
a  succession  of  flip-flops,  each  one  of 
which  leads  up  logically  to  the  next, 
without  ever  arriving  at  a  final  stop- 
ping-place. 

The  main  point  of  their  argument  is 
that  the  state  of  mind  of  a  man  short 
of  the  market  is  radically  different  from 
the  state  of  mind  of  one  who  is  long. 
Their  whole  study,  in  such  a  conversa- 
tion, is  the  mental  attitude  of  those  in- 
terested in  the  market.  If  a  majority 
of  the  volatile  class  of  in-and-out  trad- 
ers are  long,  many  of  them  will  hasten 
to  sell  on  any  sign  of  weakness  and 
a  decline  will  result.  If  the  majority 
are  short,  they  will  buy  on  any  develop- 
ment of  strength  and  an  advance  may 
be  expected. 

The  psychological  aspects  of  specula- 


12  THE   PSYCHOLOGY   OF 

tion  may  be  considered  from  two  points 
of  view,  equally  important.  One  ques- 
tion is,  What  effect  do  varying  mental 
attitudes  of  the  public  have  upon  the 
course  of  prices?  How  is  the  character 
of  the  market  influenced  by  psycholog- 
ical conditions? 

A  second  consideration  is,  How  does 
the  mental  attitude  of  the  individual 
trader  affect  his  chances  of  success? 
To  what  extent,  and  how,  can  he  over- 
come the  obstacles  placed  in  his  path- 
way by  his  own  hopes  and  fears,  his 
timidities  and  his  obstinacies? 

These  two  points  of  view  are  so 
closely  involved  and  intermingled  that 
it  is  almost  impossible  to  consider 
cither  one  alone.  It  will  be  necessary 
to  take  up  first  the  subject  of  specu- 
lative psychology  as  a  whole,  and  later 
to  attempt  to  draw  conclusions  both 
as  to  its  effects  upon  the  market  and 
its  influence  upon  the  fortunes  of  the 
individual  trader. 

As  a  convenient  starting  point  it  may 
be  well  to  trace  briefly  the  history  of 


THE   STOCK   MARKET.  13 

the  typical  speculative  cycle,  which 
runs  its  course  over  and  over,  year  after 
year,  with  infinite  slight  variations  but 
with  substantial  similarity,  on  every 
stock  exchange  and  in  every  specula- 
tive market  of  the  world — and  presum- 
ably will  continue  to  do  so  as  long  as 
prices  are  fixed  by  the  competition  of 
buyers  and  sellers,  and  as  long  as  hu- 
man beings  seek  a  profit  and  fear  a  loss.* 
Beginning  with  a  condition  of  dull- 
ness and  inactivity,  with  small  fluctu- 
ations and  very  slight  public  interest, 
prices  begin  to  rise,  at  first  almost  im- 
perceptibly. No  special  reason  appears 
for  the  advance,  and  it  is  generally 
thought  to  be  merely  temporary,  due  to 
small  professional  operations.  There 
is,  of  course,  some  short  interest  in  "the 
market,  mostly,  at  this  time,  of  the 
character  sometimes  called  a  "sleeping" 


*The  writer  discussed  this  subject  rather  fully  in 
the  Quarterly  Journal  of  Economics,  Vol.  XVI,  No.  2. 
The  article  will  also  be  found  extensively  summarized 
and  quoted  in  Vol.  VII  of  "Modern  Business,"  edited 
by  Joseph  French  Johnson,  Dean  of  New  York  Uni- 
versity School  of  Commerce. 


14  THE   PSYCHOLOGY   OF 

short  interest.  An  active  speculative 
stock  is  never  entirely  free  from  shorts. 

As  there  is  so  little  public  specula- 
tion at  this  period  in  the  cycle,  there 
are  but  few  who  are  willing  to  sell  out 
on  so  small  an  advance,  hence  prices 
are  not  met  by  any  large  volume  of 
profit-taking.  The  smaller  profes- 
sionals take  the  short  side  for  a  turn, 
with  the  idea  that  trifling  fluctuations 
are  the  best  that  can  be  hoped  for  at 
the  moment  and  must  be  taken  advan- 
tage of  if  any  profits  are  to  be  secured. 
This  class  of  selling  brings  prices  back 
almost  to  their  former  dead  level. 

Soon  another  unostentatious  upward 
movement  begins,  carrying  prices  a 
trifle  higher  than  the  first.  A  few 
shrewd  traders  take  the  long  side,  but 
the  public  is  still  unmoved  and  the 
sleeping  short  interest — most  of  it  orig- 
inally put  out  at  much  higher  figures — 
still  refuses  to  waken. 

Gradually  prices  harden  further  and 
finally  advance  somewhat  sharply.  A 
few  of  the  more  timid  shorts  cover,  per- 


THE   STOCK   MARKET.  15 

haps  to  save  a  part  of  their  profits  or 
to  prevent  their  trades  from  running 
into  a  loss.  The  fact  that  a  bull  turn 
is  coming  now  penetrates  through  an- 
other layer  of  intellectual  density  and 
another  wave  of  traders  take  the  long 
side.  The  public  notes  the  advance  and 
begins  to  think  some  further  upturn 
is  possible,  but  that  there  will  be  plenty 
of  opportunities  to  buy  on  substantial 
reactions. 

Strangely  enough,  these  reactions,  ex- 
cept of  the  most  trifling  character,  do 
not  appear.  Waiting  buyers  do  not  get 
a  satisfactory  chance  to  take  hold. 
Prices  begin  to  move  up  faster.  There 
is  a  halt  from  time  to  time,  but  when 
a  real  reaction  finally  comes  the  market 
looks  "too  weak  to  buy,"  and  when  it 
starts  up  again  it  often  does  so  with  a 
sudden  leap  that  leaves  would-be  pur- 
chasers far  in  the  rear. 

At  length  the  more  stubborn  bears 
become  alarmed  and  begin  to  cover  in 
large  volume.  The  market  "boils,"  and 
to  the  short  who  is  watching  the  tape, 


16  THE    PSYCHOLOGY   OF 

seems  likely  to  shoot  through  the  ceil- 
ing at  almost  any  moment.  However 
firm  may  be  his  bearish  convictions,  his 
nervous  system  eventually  gives  out  un- 
der this  continual  pounding,  and  he 
covers  everything  "at  the  market"  with 
a  sigh  of  relief  that  his  losses  are  no 
greater. 

About  this  time  the  outside  public 
begins  to  reach  the  conclusion  that  the 
market  is  "too  strong  to  react  much," 
and  that  the  only  thing  to  do  is  to  "buy 
'em  anywhere."  From  this  source 
comes  another  wave  of  buying,  which 
soon  carries  prices  to  new  high  levels, 
and  purchasers  congratulate  themselves 
on  their  quick  and  easy  profits. 

For  every  buyer  there  must  be  a 
seller — or,  more  accurately,  for  every 
one  hundred  shares  bought  one  hundred 
shares  must  be  sold,  as  the  actual  num- 
ber of  persons  buying  at  this  stage  is 
likely  to  be  much  greater  than  the  num- 
ber of  persons  selling.  Early  in  the 
advance  the  supply  of  stocks  is  small 
and  comes  from  scattered  sources,  but 


THE    STOCK   MARKET.  17 

as  prices  rise,  more  and  more  holders 
become  satisfied  with  their  profits  and 
willing  to  sell.  The  bears,  also,  begin 
to  fight  the  advance  by  by  selling  short 
on  every  quick  rise.  A  stubborn  pro- 
fessional bear  will  often  be  forced  to 
cover  again  and  again,  with  a  small 
loss  each  time,  before  he  finally  locates 
the  top  and  secures  a  liberal  profit  on 
the  ensuing  decline. 

Those  selling  at  this  stage  are  not, 
as  a  rule,  the  largest  holders.  The  larg- 
est holders  are  usually  those  whose 
judgment  is  sound  enough,  or  whose 
connections  are  good  enough,  so  that 
they  have  made  a  good  deal  of  money; 
and  neither  a  sound  judgment  nor  the 
best  advisers  are  likely  to  favor  selling 
so  early  in  the  advance,  when  much 
larger  profits  can  be  secured  by  simply 
holding  on. 

The  height  to  which  prices  can  now 
be  carried  depends  on  the  underlying 
conditions.  If  money  is  easy  and  gen- 
eral business  prosperous  a  prolonged 
bull  movement  may  result,  while 


18  THE   PSYCHOLOGY   OF 

strained  banking  resources  or  depressed 
trade  will  set  a  definite  limit  to  the 
possible  advance.  If  conditions  are 
bearish,  the  driving  of  the  biggest 
shorts  to  cover  will  practically  end  the 
rise;  but  in  a  genuine  bull  market  the 
advance  will  continue  until  checked  by 
sales  of  stocks  held  for  investment, 
which  come  upon  the  market  only 
when  prices  are  believed  to  be  unduly 
high. 

In  a  sense,  the  market  is  always  a 
contest  between  investors  and  specula- 
tors. The  real  investor,  looking  chiefly 
to  interest  return,  but  by  no  means  un- 
willing to  make  a  profit  by  buying  low 
and  selling  high,  is  ready,  perhaps,  to 
buy  his  favorite  stock  at  a  price  which 
will  yield  him  six  per  cent,  on  his  in- 
vestment, or  to  sell  at  a  price  yielding 
only  four  per  cent.  The  speculator 
cares  nothing  about  interest  return. 
He  wants  to  buy  before  prices  go  up 
and  to  sell  short  before  they  go  down. 
He  would  as  soon  buy  at  the  top  of  a 


THE    STOCK    MARKET.  19 

big  rise  at  any  other  time,  provided  prices 
are  going  still  higher. 

As  the  market  advances,  therefore, 
one  investor  after  another  sees  his  limit 
reached  and  his  stock  sold.  Thus  the 
volume  of  stocks  to  be  carried  or  tossed 
from  hand  to  hand  by  bullish  specula- 
tors is  constantly  rolling  up  like  a 
snowball.  On  the  ordinary  intermedi- 
ate fluctuations,  covering  five  to 
twenty  dollars  a  share,  these  sales  by 
investors  are  small  compared  with  the 
speculative  business.  In  one  hundred 
shares  of  a  stock  selling  at  150,  the 
investor  has  $15,000;  but  with  this  sum 
the  speculator  can  easily  carry  ten 
times  that  number  of  shares. 

The  reason  why  sales  by  investors^ 
are  so  effective  is  not  because  of  the 
actual  amount  of  stock  thrown  on  the 
market,  but  because  this  stock  is  a  per- 
manent load,  which  will  not  be  got 
rid  of  again  until  prices  have  suffered 
a  severe  decline.  What  the  speculator 
sells  he  or  some  other  trader  may  buy 
back  tomorrow. 


20  THE   PSYCHOLOGY  "OF 

The  time  comes  when  everybody 
seems  to  be  buying.  Prices  become 
confused.  One  stock  leaps  upward  in 
a  way  to  strike  terror  to  the  heart  of 
the  last  surviving  short.  Another  ap- 
pears almost  equally  strong,  but  slips 
back  unobtrusively  when  nobody  is 
looking,  like  the  frog  jumping  out  of 
the  well  in  the  arithmetic  of  our  boy- 
hood. Still  another  churns  violently  in 
one  place,  like  a  side-wheeler  stuck  on 
a  sand-bar. 

Then  the  market  gives  a  sudden 
lurch  downward,  as  though  in  danger 
of  spilling  out  its  unwieldy  contents. 
This  is  hailed  as  a  "healthy  reaction," 
though  it  is  a  mystery  whom  it  can  be 
healthy  for,  unless  it  is  the  shorts. 
Prices  recover  again,  with  everybody 
happy  except  a  few  disgruntled  bears, 
who  are  rightly  regarded  with  con- 
temptuous amusement. 

Curiously,  however,  there  seems  to 
be  stock  enough  for  all  comers,  and 
the  few  cranks  who  have  time  to 
bother  with  such  things  notice  that 


THE    STOCK   MARKET.  21 

the  general  average  of  prices  is  now 
rising  very  slowly,  if  at  all.  The  larg- 
est speculative  holders  of  stocks,  find- 
ing a  market  big  enough  to  absorb 
their  sales,,  are  letting  go.  And  there 
are  always  stocks  enough  to  go  around. 
Our  big  capitalists  are  seldom  entirely 
out  of  stocks.  They  merely  have  more 
stocks  when  prices  are  low  and  fewer 
when  prices  are  high.  Moreover,  long 
before  there  is  any  danger  of  the  sup- 
ply running  out,  plenty  of  new  issues 
are  created. 

When  there  is  a  general  public  inter- 
est in  the  stock  market,  an  immense 
amount  of  realizing  will  often  be  ab- 
sorbed within  three  or  four  days  or  a 
week,  after  which  the  deluge;  but  if 
speculation  is  narrow,  prices  may  re- 
main around  top  figures  for  weeks  or 
months,  while  big  holdings  are  fed  out, 
a  few  hundred  shares  here  and  a  few 
hundred  there,  and  even  then  a  bal- 
ance may  be  left  to  be  thrown  over  on 
the  ensuing  decline  at  whatever  prices 
can  be  obtained.  Great  speculative 


22  THE   PSYCHOLOGY   OF 

leaders  are  far  from  infallible.  They 
have  often  sold  out  too  soon  and  later 
have  seen  the  market  run  away  to  un- 
expected heights,  or  have  held  on  too 
long  and  have  suffered  severe  losses 
before  they  could  get  out. 

In  this  selling  the  bull  leaders  get  a 
good  deal  of  undesired  help  from  the 
bears.  However  wary  the  bulls  may 
be  in  concealing  their  sales,  their  machi- 
nations will  be  discovered  by  watch- 
ful professionals  and  shrewd  chart  stu- 
dents, and  a  considerable  sprinkling  of 
short  sales  will  be  put  out  within  a 
few  points  of  the  top.  This  is  one  of 
>  the  reasons  why  the  long  swings  in 
active  speculative  stocks  are  smaller 
in  proportion  to  price  than  in  inactive 
specialties  of  a  similar  character — 
contrary  to  the  generally  received  im- 
pression. It  is  rare  that  any  consider- 
able short  interest  exists  in  the  inactive 
stocks. 

Once  the  top-heavy  load  is  over- 
turned, the  decline  is  usually  more 
rapid  than  the  previous  advance.  The 


THE    STOCK   MARKET.  23 

floating  supply,  now  greatly  increased, 
is  tossed  about  from  one  speculator  to 
another  at  lower  and  lower  prices. 
From  time  to  time  stocks  become  tem- 
porarily lodged  in  stubborn  hands,  so 
that  part  of  the  shorts  take  fright  and 
cover,  causing  a  sharp  upturn;  but  so 
long  as  the  load  of  stocks  is  still  on 
the  market  the  general  course  of  prices 
must  be  downward. 

Until  investors  or  big  speculative 
capitalists  again  come  into  the  market^ 
the  load  of  stocks  to  be  carried  by  or- 
dinary speculative  bulls  increases  al- 
most continually.  There  is  no  lessen- 
ing of  the  floating  supply  of  stock  cer- 
tificates in  the  Street,  and  there  is  a 
gradual  increase  in  the  short  interest; 
and  of  course  the  bulls  have  to  carry 
these  short  sales  as  well  as  the  actual 
certificates,  since  for  every  seller  there 
must  be  a  buyer,  whether  the  sale  be 
made  by  a  short  or  a  long.  Shorts 
cover  again  and  again  on  the  sharp 
breaks,  but  in  most  cases  they  put  out 
their  lines  again,  either  higher  or  lower, 


24  THE    PSYCHOLOGY    OF 

as  opportunity  offers.  On  the  average, 
the  short  interest  is  largest  at  low 
prices,  though  there  are  likely  to  be 
periods  during  the  decline  when  it  will 
be  larger  than  at  the  final  bottom, 
where  buying  by  shorts  often  helps  to 
avert  panicky  conditions. 

The  length  of  this  decline,  like  the 
extent  of  the  preceding  advance,  de- 
pends on  fundamental  conditions;  for 
both  investors  and  speculative  capital- 
ists will  come  into  the  market  sooner 
if  all  conditions  are  favorable  than  they 
will  in  a  stringent  money  market  or 
wrhen  the  future  prospects  of  business 
are  unsatisfactory.  As  a  rule,  buyers 
do  not  appear  in  force  until  a  "bargain 
day"  appears.  This  is  when,  in  its 
downward  course,  the  heavy  load  of 
stocks  strikes  an  area  honeycombed 
with  stop  loss  orders.  Floor  traders 
seize  the  opportunity  to  put  out  short 
lines  and  a  general  collapse  results. 

Here  are  plenty  of  stocks  to  be  had 
cheap,  and  shrewd  operators — large 
and  small,  but  mostly  large  or  on  the 


THE    STOCK   MARKET.  25 

way  to  become  so — are  busy  picking 
them  up.  The  fixed  limits  of  many  in- 
vestors are  also  reached  by  the  sharp 
break,  and  their  purchases  disappear, 
to  be  seen  in  the  Street  no  more  until 
the  next  bull  turn. 

Many  shorts  cover  on  such  a  break, 
but  not  all.  The  sequel  to  the  "bar- 
gain day"  is  a  big  short  interest  which 
has  overstayed  its  market,  and  a  quick 
rally  follows ;  but  when  the  more 
urgent  shorts  get  relief,  prices  sag 
again  and  fall  into  that  condition  of 
lethargy  from  which  this  consideration 
of  the  speculative  cycle  started. 

The  movements  described  are  sub- 
stantially uniform,  whether  the  cycle 
be  one  covering  a  week,  a  month,  or  a 
year.  The  big  cycle  includes  many 
intermediate  movements,  and  these 
movements  in  turn  contain  smaller 
swings.  Investors  do  not  participate  to 
any  extent  in  the  small  swings,  but  other- 
wise the  forces  involved  in  a  three-point 
turn  up  and  down  are  substantially  the 
same  as  those  which  appear  in  a  thirty- 


26          PSYCHOLOGY  OF  STOCKS. 

point  cycle,  though  not  so  easy  to  iden- 
tify. 

The  fact  will  at  once  be  recognized 
that  the  above  description  is,  in  es- 
sence, a  story  of  human  hopes  and 
fears ;  of  a  mental  attitude,  on  the  part 
of  those  interested,  resulting  from  their 
own  position  in  the  market,  rather  than 
from  any  deliberate  judgment  of  con- 
ditions ;  of  an  unwarranted  projection 
by  the  public  imagination  of  a  perceived 
present  into  an  unknown  though  not 
wholly  unknowable  future. 

Laying  aside  for  the  present  the  in- 
fluence of  fundamental  conditions  on 
prices,  it  is  our  task  to  trace  out  both 
the  causes  and  the  effects  of  these 
psychological  elements  in  speculation. 


II — Inverted  Reasoning  and  its 
Consequences 

IT  is  hard  for  the  average  man  to  op- 
pose what  appears  to  be  the  gen- 
eral drift  of  public  opinion.  In  the 
stock  market  this  is  perhaps  harder 
than  elsewhere ;  for  we  all  realize  that 
the  prices  of  stocks  must,  in  the  long 
run,  be  controlled  by  public  opinion. 
The  point  we  fail  to  remember  is  that 
public  opinion  in  a  speculative  market 
is  measured  in  dollars,  not  in  popula- 
tion. One  man  controlling  one  million 
dollars  has  double  the  weight  of  five 
hundred  men  with  one  thousand  dol- 
lars each.  Dollars  are  the  horse-power 
of  the  markets — the  mere  number  of 
men  does  not  signify. 

This  is  why  the  great  body  of  opinion 
appears  to  be  bullish  at  the  top  and 
bearish  at  the  bottom.  The  multitude 
of  small  traders  must  be,  as  a  plain 


28  THE   PSYCHOLOGY   OF 

necessity,  long  when  prices  are  at  the 
top,  and  short  or  out  of  the  market  at 
the  bottom.  The  very  fact  that  they 
are  long  at  the  top  shows  that  they 
have  been  supplied  with  stocks  from 
some  source. 

Again,  the  man  with  one  million  dol- 
lars is  a  silent  individual.  The  time 
when  it  was  necessary  for  him  to  talk 
is  past — his  money  now  does  the  talk- 
ing. But  the  one  thousand  men  who 
have  one  thousand  dollars  each  are 
conversational,  fluent,  verbose  to  the 
last  degree;  and  among  these  smaller 
traders  are  the  writers — the  newspaper 
and  news  bureau  men,  and  the  manu- 
facturers of  gossip  for  brokerage 
houses. 

It  will  be  observed  that  the  above 
course  of  reasoning  leads  us  to  the  con- 
clusion that  most  of  those  who  write 
and  talk  about  the  market  are  more 
likely  to  be  wrong  than  right,  at  least 
so  far  as  speculative  fluctuations  are 
concerned.  This  is  not  complimentary 
to  the  "moulders  of  public  opinion/' 


THE    STOCK   MARKET.  29 

but  most  seasoned  newspaper  readers 
will  agree  that  it  is  true.  The  press 
reflects,  in  a  general  way,  the  thoughts 
of  the  multitude,  and  in  the  stock  mar- 
ket the  multitude  is  necessarily,  as  a 
logical  deduction  from  the  facts  of  the 
case,  likely  to  be  bullish  at  high  prices 
and  bearish  at  low. 

It  has  often  been  remarked  that  the 
average  man  is  an  optimist  regarding 
his  own  enterprises  and  a  pessimist  re- 
garding those  of  others.  Certainly  this 
is  true  of  the  professional  trader  in 
stocks.  As  a  result  of  the  reasoning 
outlined  above,  he  comes  habitually  to 
expect  that  nearly  every  one  else  will 
be  wrong,  but  is,  as  a  rule,  confident 
that  his  own  analysis  of  the  situation 
will  prove  correct.  He  values  the  opin- 
ions of  a  few  persons  whom  he  be- 
lieves to  be  generally  successful ;  but 
aside  from  these  few,  the  greater  the 
number  of  the  bullish  opinions  he 
hears,  the  more  doubtful  he  becomes 
about  the  wisdom  of  following  the  bull 
side. 


30  THE    PSYCHOLOGY    OF 

This  apparent  contrariness  of  the 
market,  although  easily  understood 
when  its  causes  are  analyzed,  breeds 
in  professional  traders  a  peculiar  sort 
of  skepticism — leads  them  always  to 
distrust  the  obvious  and  to  apply  a 
kind  of  inverted  reasoning  to  almost 
all  stock  market  problems.  Often,  in 
the  minds  of  traders  who  are  not  natu- 
rally logical,  this  inverted  reasoning 
assumes  the  most  erratic  and  gro- 
tesque forms,  and  it  accounts  for  many 
apparently  absurd  fluctuations  in  prices 
which  are  commonly  charged  to  ma- 
nipulation. 

For  example,  a  trader  starts  with 
this  assumption :  The  market  has  had 
a  good  advance ;  all  the  small  traders 
are  bullish;  somebody  must  have  sold 
them  the  stock  which  they  are  carry- 
ing; hence  the  big  capitalists  are  prob- 
ably sold  out  or  short  and  ready  for  a 
reaction  or  perhaps  for  a  bear  market. 
Then  if  a  strong  item  of  bullish  news 
comes  out — one,  let  us  say,  that  really 
makes  an  important  change  in  the 


THE    STOCK   MARKET.  31 

situation — he  says,  "Ah,  so  this  is  what 
they  have  been  bulling  the  market  on ! 
It  has  been  discounted  by  the  previous 
rise."  Or  he  may  say,  "They  are  put- 
ting out  this  bull  news  to  sell  stocks 
on."  He  proceeds  to  sell  out  any  long 
stocks  he  may  have  or  perhaps  to  sell 
short. 

His  reasoning  may  be  correct  or  it 
may  not;  but  at  any  rate  his  selling 
and  that  of  others  who  reason  in  a 
similar  way,  is  likely  to  produce  at 
least  a  temporary  decline  on  the  an- 
nouncement of  the  good  news.  This 
decline  looks  absurd  to  the  outsider 
and  he  falls  back  on  the  old  explana- 
tion, "All  manipulation." 

The  same  principle  is  often  carried 
further.  You  will  find  professional 
traders  reasoning  that  favorable  fig- 
ures on  the  steel  industry,  for  example, 
have  been  concocted  to  enable  insiders 
to  sell  their  Steel ;  or  that  gloomy  re- 
ports are  put  in  circulation  to  facilitate 
accumulation.  Hence  they  may  act  in 
direct  opposition  to  the  news  and  carry 


32  THE    PSYCHOLOGY    OF 

the  market  with  them,  for  the  time  at 
least. 

The  less  the  trader  knows  about  the 
fundamentals. of  the  financial  situation 
the  more  likely  he  is  to  be  led  astray 
in  conclusions  of  this  character.  If  he 
has  confidence  in  the  general  strength 
of  conditions  he  may  be  ready  to  ac- 
cept as  genuine  and  natural,  a  piece  of 
news  which  he  would  otherwise  receive 
with  cynical  skepticism  and  use  as  a 
basis  for  short  sales.  If  he  knows  that 
fundamental  conditions  are  unsound, 
he  will  not  be  so 'likely  to  interpret  bad 
news  as  issued  to  assist  in  accumula- 
tion of  stocks. 

The  same  reasoning  is  applied  to 
large  purchases  through  brokers  kno,wn 
to  be  associated  with  capitalists.  In  fact, 
in  this  case  we  often  hear  a  double  in- 
version, as  it  were.  Such  buying  may 
impress  the  observer  in  three  ways : 

1.  The  "rank  outsider"  takes  it  at 
face  value,  as  bullish. 

2.  A  more  experienced  trader  may 
say,  "If  they  really  wished  to  get  the 


THE   STOCK  MARKET.  33 

stocks  they  would  not  buy  through 
their  own  brokers,  but  would  endeavor 
to  conceal  their  buying  by  scattering 
it  among  other  houses." 

3.  A  still  more  suspicious  profes- 
sional may  turn  another  mental  somer- 
sault and  say,  'They  are  buying 
through  their  own  brokers  so  as  to 
throw  us  off  the  scent  and  make  us 
think  someone  else  is  using  their  bro- 
kers as  a  blind."  By  this  double  somer- 
sault such  a  trader  arrives  at  the  same 
conclusion  as  the  outsider. 

The  reasoning  of  traders  becomes 
even  more  complicated  when  large 
buying  or  selling  is  done  openly  by  a 
big  professional  who  is  known  to  trade 
in  and  out  for  small  profits.  If  he  buys 
50,000  shares,  other  traders  are  quite 
willing  to  sell  to  him  and  their  opinion 
of  the  market  is  little  influenced, 
simply  because  they  know  he  may  sell 
50,000  the  next  day  or  even  the  next 
hour.  For  this  reason  great  capitalists 
sometimes  buy  or  sell  through  such  big 
professional  traders  in  order  to  execute 


34  THE   PSYCHOLOGY   OF 

their  orders  easily  and  without  arous- 
ing suspicion.  Hence  the  play  of  subtle 
intellects  around  big  trading  of  this 
kind  often  becomes  very  elaborate. 

It  is  to  be  noticed  that  this  inverted 
reasoning  is  useful  chiefly  at  the  top 
or  bottom  of  a  movement,  when  dis- 
tribution or  accumulation  is  taking 
place  on  a  large  scale.  A  market  which 
repeatedly  refuses  to  respond  to  good 
news  after  a  considerable  advance  is 
likely  to  be  "full  of  stocks."  Likewise 
a  market  which  will  not  go  down  on 
bad  news  is  usually  "bare  of  stocks." 

Between  the  extremes  will  be  found 
long  stretches  in  which  capitalists  have 
very  little  cause  to  conceal  their  posi- 
tion. Having  accumulated  their  lines 
as  low  as  possible,  they  are  then  willing 
to  be  known  as  the  leaders  of  the  up- 
ward movement  and  have  every  reason 
to  be  perfectly  open  in  their  buying. 
This  condition  continues  until  they  are 
ready  to  sell.  Likewise,  having  sold  as 
much  as  they  desire,  they  have  no 
reason  to  conceal  their  position  further. 


-THE    STOCK   MARKET.  35 

even  though  a  subsequent  decline  may 
run  for  months  or  a  year. 

It  is  during  a  long  upward  move- 
ment that  the  "lamb"  makes  money, 
because  he  accepts  facts  as  facts,  while  «/ 
the  professional  trader  is  often  found 
fighting  the  advance  and  losing  heavily 
because  of  his  over-development  of 
cynicism  and  suspicion. 

The  successful  trader  eventually 
learns  when  to  invert  his  natural  men- 
tal processes  and  when  to  leave  them 
in  their  usual  position.  Often  he 
develops  a  sort  of  instinct  which  could 
scarcely  be  reduced  to  cold  print.  But 
in  the  hands  of  the  tyro  this  form  of 
reasoning  is  exceedingly  dangerous,  be- 
cause it  permits  of  putting  an  alternate 
construction  on  any  event.  Bull  news 
either  (1)  is  significant  of  a  rising 
trend  of  prices,  or  (2)  indicates  that 
"they"  are  trying  to  make  a  market 
to  sell  on.  Bad  news  may  indicate 
either  a  genuinely  bearish  situation  or 
a  desire  to  accumulate  stocks  at  low 
prices. 


36  THE   PSYCHOLOGY   OF 

The  inexperienced  operator  is  there- 
fore left  very  much  at  sea.  He  is  play- 
ing with  the  professional's  edged  tools 
and  is  likely  to  cut  himself.  Of  what 
use  is  it  for  him  to  try  to  apply  his 
reason  to  stock  market  conditions  when 
every  event  may  be  doubly  interpreted? 

Indeed,  it  is  doubtful  if  the  profes- 
sional's distrust  of  the  obvious  is  of 
much  benefit  to  him  in  the  long  run. 
Most  of  us  have  met  those  deplorable 
mental  wrecks,  often  found  among  the 
"chairwarmers"  in  brokers'  offices, 
whose  thinking  machinery  seems  to 
have  become  permanently  demoralized 
as  a  result  of  continued  acrobatics. 
They  are  always  seeking  an  "ulterior 
motive"  in  everything.  They  credit — 
or  debit — Morgan  and  Rockefeller  with 
the  smallest  and  meanest  trickery  and 
ascribe  to  them  the  most  artful  duplici- 
ty in  matters  which  those  "high  finan- 
ciers" wouldn't  stoop  to  notice.  The 
continual  reversal  of  the  mental  engine 
sometimes  deranges  its  mechanism. 

Probably  no  better  general  rule  can 


THE    STOCK   MARKET.  37 

be  laid  down  than  the  brief  one,  "Stick 
to  common  sense/'  Maintain  a  bal- 
anced, receptive  mind  and  avoid  ab- 
struse deductions.  A  few  further  sug- 
gestions may,  however,  be  offered : 

If  you  already  have  a  position,  in 
the  market,  do  not  attempt  to  bolster 
up  your  failing  faith  by  resorting  to 
intellectual  subtleties  in  the  interpre- 
tation of  obvious  facts.  If  you  are 
long  or  short  of  the  market,  you  are 
not  an  unprejudiced  judge,  and  you  will 
be  greatly  tempted  to  put  such  an  in- 
terpretation upon  current  events  as  will 
coincide  with  your  preconceived  opin- 
ion. It  is  hardly  too  much  to  say  that 
this  is  the  greatest  obstacle  to  success. 
The  least  you  can  do  is  to  avoid  in- 
verted reasoning  in  support  of  your 
own  position. 

After  a  prolonged  advance,  do  not 
call  inverted  reasoning  to  your  aid  in 
order  to  prove  that  prices  are  going 
still  higher;  likewise  after  a  big  break 
do  not  let  your  bearish  deductions  be- 
come too  complicated.  Be  suspicious 


38        PSYCHOLOGY    OF    STOCKS. 

of  bull  news  at  high  prices,  and  of  bear 
news  at  low  prices. 

Bear  in  mind  that  an  item  of  news 
usually  causes  but  one  considerable 
movement  of  prices.  If  the  movement 
takes  place  before  the  news  comes  out, 
as  a  result  of  rumors  and  expectations, 
then  it  is  not  likely  to  be  repeated  after 
the  announcement  is  made;  but  if  the 
movement  of  prices  has  not  preceded, 
then  the  news  contributes  to  the  gen- 
eral strength  or  weakness  of  the  situ- 
ation and  a  movement  of  prices  may 
follow. 


Ill— "They  " 

IF  a  man  entirely  unfamiliar  with  the 
stock  market  should  spend  several 
days  around  the   Exchange  listen- 
ing to  the  conversation  of  all  sorts  of 
traders  and  investors,  in  order  to  pick 
up  information  about  the  causes  of  price 
movements,  the  probability   is   that  the 
most  pressing  question  in  his  mind  at  the 
end  of  that  time  would  be  "Who  are 
They?'" 

Everywhere  he  went  he  would 
hear  about  Them.  In  the  customers' 
rooms  of  the  fractional  lot  houses 
he  would  find  young  men  trading  in 
ten  shares  and  arguing  learnedly  as 
to  what  They  were  to  do  next.  Tape 
readers — experts  and  tyros  alike — 
would  tell  him  that  They  were  accumu- 
lating Steel,  or  distributing  Reading. 
Floor  traders  and  members  of  the  Ex- 
change would  whisper  that  they  were 


40  THE   PSYCHOLOGY   OF 

told  They  were  going  to  put  the  market 
up,  or  down,  as  the  case  might  be.  Even 
sedate  investors  might  inform  him  that, 
although  the  situation  was  bearish,  un- 
doubtedly They  would  have  to  put  the 
market  temporarily  higher  in  order  to 
unload  Their  stocks. 

This  "They"  theory  of  the  market  is 
quite  as  prevalent  among  successful 
traders  as  among  beginners — probably 
more  so.  There  may  be  room  for  argu- 
ment as  to  why  this  is  so,  but  as  to  the 
fact  itself  there  is  no  doubt.  Whether 
They  are  a  myth  or  a  definite  reality, 
many  persons  are  making  money  by 
studying  the  market  from  this  point  of 
view. 

If  you  were  to  go  around  Wall  street 
and  ask  various  classes  of  traders  who 
They  are,  you  would  get  nearly  as  many 
different  answers  as  the  number  of  peo- 
ple interviewed.  One  would  say,  "The 
house  of  Morgan";  another,  "Standard 
Oil  and  associated  interests" — which  is 
pretty  broad,  when  you  stop  to  think  of 
it ;  another,  "The  big  banking  interests" ; 


THE   STOCK   MARKET.  41 

still  another,  "Professional  traders  on  the 
floor";  a  fifth,  "Pools  in  the  various  fa- 
vorite stocks,  which  act  more  or  less  in 
concert" ;  a  sixth  might  say,  "Shrewd  and 
successful  speculators,  whoever  and 
wherever  they  are" ;  while  to  the  seventh, 
They  may  typify  merely  active  traders 
as  a  whole,  whom  he  conceives  to  make 
prices  by  falling  over  each  other  to  buy 
or  to  sell. 

Indeed,  one  writer  of  no  small  attain- 
ments as  a  student  of  market  conditions 
believes  that  the  entire  phenomena  of  the 
New  York  stock  market  are  under  the 
control  of  some  one  individual,  who  is 
presumably,  in  some  way  or  other,  the 
representative  of  great  associated  inter- 
ests. 

It  seems  obviously  impossible  to  trace 
to  its  source,  tag  and  identify  any  sort 
of  permanent  controlling  power.  The 
stock  markets  of  the  world  move  pretty 
much  together  in  the  broad  cyclical 
swings,  so  that  such  a  power  would  have 
to  consist  of  a  world-wide  association  of 
great  financial  interests,  controlling  all  of 


42  THE    PSYCHOLOGY   OF 

the  principal  security  markets.  The  av- 
erage observer  will  find  it  difficult  to 
masticate  and  swallow  this  proposition. 

The  effort  to  reduce  the  science  of 
speculation  and  investment  to  an  impos- 
sible definiteness  or  an  ideal  simplicity 
is,  I  believe,  responsible  for  many  fail- 
ures. A.  S.  Hardy,  the  diplomat,  who  was 
formerly  a  professor  of  mathematics  and 
wrote  books  on  quaternions,  differential 
calculus,  etc.,  once  remarked  that  the 
study  of  mathematics  is  very  poor  mental 
discipline,  because  it  does  not  cultivate 
the  judgment.  Given  fixed  and  certain 
premises,  your  mathematician  will  follow 
them  out  to  a  correct  conclusion;  but  in 
practical  affairs  the  whole  difficulty  lies 
in  selecting  your  premises. 

So  the  market  student  of  a  mathemat- 
ical turn  of  mind  is  always  seeking  a 
rule  or  a  set  of  rules — a  "sure  thing"  as 
traders  put  it.  He  would  not  seek  such 
rules  for  succeeding  in  the  grocery  busi- 
ness or  the  lumber  business;  he  would, 
on  the  contrary,  analyze  each  situation  as 
it  arose  and  act  accordingly.  The  stock 


THE    STOCK    MARKET.  43 

market  presents  itself  to  my  mind  as  a 
purely  practical  proposition.  Scientific 
methods  may  be  applied  to  any  line  of 
business,  from  stocks  to  chickens,  but 
this  is  a  very  different  thing  from  trying 
to  reduce  the  fluctuations  of  the  stock 
market  to  a  basis  of  mathematical  cer- 
tainty. 

In  discussing  the  identity  of  Them, 
therefore,  we  must  be  content  to  take 
obvious  facts  as  we  find  them  without 
attempting  to  spin  fine  theories. 

There  are  three  senses  in  which  this 
idea  of  'Them"  has  some  foundation  in 
fact.  First,  "They"  may  be  and  often 
are  roughly  conceived  of  as  the  floor 
traders  on  the  Stock  Exchange  who  are 
directly  concerned  in  making  quotations, 
pools  formed  to  control  certain  stocks,  or 
individual  manipulators. 

Floor  traders  exercise  an  important  in- 
fluence on  the  immediate  movement  of 
prices.  Suppose,  for  example,  they  ob- 
serve that  offerings  of  Reading  are  very 
light.  Declines  do  not  induce  liquidation 
and  only  small  offerings  of  stock  are  met 


44  THE   PSYCHOLOGY   OF 

on  advances.  They  begin  to  feel  that,  in 
the  absence  of  unexpected  cataclysms, 
Reading  will  not  decline  much.  The  nat- 
ural thing  for  them  to  do  is  to  begin  buy- 
ing Reading  on  all  soft  spots.  Whenever 
a  few  hundred  shares  are  offered  at  a 
bargain,  floor  traders  snap  up  the  stock. 
As  a  result  of  this  "bailing  out"  of  the 
market,  Reading  becomes  scarcer  still, 
and  traders,  being  now  long,  become 
more  bullish.  They  begin  to  "mark  up 
prices."  This  is  not  difficult,  since  they 
are,  for  the  time  being,  practically  unani- 
mous in  a  desire  for  higher  prices.  Sup- 
pose the  market  is  161  J^j  bid,  offered  at 
161%.  They  find  that  only  100  shares 
are  for  sale  at  J4,  and  200  are  offered 
at  3/g.  As  to  how  much  stock  may  be 
awaiting  bids  at  yZ  or  higher,  they  can- 
not be  sure,  but  can  generally  make  a 
shrewd  guess.  One  or  more  traders  take 
these  offerings,  of  perhaps  500  shares, 
and  make  the  market  3/2  bid.  The  other 
floor  traders  are  not  willing  to  sell  at 
this  trifling  profit,  and  a  wait  ensues  to 
see  whether  any  outside  orders  are  at- 


THE    STOCK-MARKET.  45 

traded  by  the  movement  of  the  price, 
and  if  so,  whether  they  are  buying  or 
selling  orders.  If  a  few  buying  orders 
come  in,  they  are  rilled,  perhaps  at  ^ 
and  24-  If  selling  appears,  the  floor 
traders  retire  in  good  order,  take  the 
offerings  at  lower  prices,  and  try  it  again 
the  next  day  or  perhaps  the  next  hour. 
Eventually,  by  seizing  every  favorable 
opportunity,  they  engineer  an  upward 
move  of  perhaps  two  or  three  points 
without  taking  any  more  stock  than  they 
want. 

If  such  a  movement  attracts  a  follow- 
ing, it  may  easily  run  ten  points  without 
any  real  change  in  the  prospects  of  the 
Reading  road — though  the  prospects  of 
the  road  may  have  had  something  to  do 
with  making  the  stock  scarce  before  the 
movement  started.  On  the  other  hand, 
if  large  offerings  of  stock  are  en- 
countered at  the  advance,  the  boomlet  is 
ignominiously  squelched  and  the  floor 
traders  make  trifling  profits  or  losses. 

Pools  are  not  so  common  as  most  out- 
siders believe.  There  are  many  difficul- 


46  THE   PSYCHOLOGY   OF 

ties  and  complications  to  be  overcome  be- 
fore a  pool  can  be  formed,  held  together, 
and  operated  successfully,  as  we  had  am- 
ple opportunity  to  observe  not  long  ago 
in  the  case  of  Hocking  Coal  &  Iron. 
But  if  a  definite  pool  exists  in  any  stock, 
its  operations  are  practically  a  reproduc- 
tion, on  a  larger  scale  and  under  a  bind- 
ing agreement,  of  the  methods  employed 
by  floor  traders  over  a  smaller  range  and 
in  a  mere  loose  and  voluntary  associa- 
tion resulting  from  their  common  inter- 
ests. And  the  individual  manipulator  is 
only  a  pool  consisting  of  one  person. 

Second,  many  conceive  "Them"  as  an  as- 
sociation of  powerful  capitalists  who  are 
running  a  campaign  in  all  the  important 
speculative  stocks  simultaneously.  It  is 
safe  to  say  that  no  such  permanent  and 
united  association  exists,  though  it  would 
be  hard  to  prove  such  a  statement.  But 
there  have  been  many  times  when  a  sin- 
gle great  interest  was  practically  in  con- 
trol of  the  market  for  a  time,  other  in- 
terests being  content  to  look  on,  or  to 


THE    STOCK    MARKET.  47 

participate  in  a  small  way,  or  to  await  a 
favorable  chance  to  take  the  other  side. 

The  "Standard  Oil  crowd,"  the  "Gates 
crowd/'  the  "Morgan  interests/'  and 
Harriman  and  his  associates,  will  at 
once  occur  to  the  reader  as  having  been, 
at  various  times  in  the  past,  in  sole  con- 
trol of  an  important  general  campaign. 
At  present  the  great  interests  are  gen- 
erally classified  into  three  divisions — 
Morgan,  Standard  Oil,  and  Kuhn-Loeb. 

A  definite  agreement  among  such  in- 
terests as  these  would  be  impossible,  ex- 
cept for  limited  and  temporary  purposes. 
This  is  perhaps  not  so  much  because 
these  high  financiers  couldn't  trust  each 
other,  as  it  is  because  each  so-called  in- 
terest consists  of  a  loosely  bound  aggre- 
gation of  followers  of  all  sorts  and  va- 
rieties, having  only  one  thing  in  com- 
mon— control  of  capital.  Such  an  "in- 
terest" is  not  an  army,  where  the  traitor 
can  be  court-martialed  and  shot;  it  is 
a  mob,  and  has  to  be  led,  not  driven. 
True,  the  known  traitor  might  be  put  to 
death,  financially  speaking,  but  in  stock 


48  THE    PSYCHOLOGY   OF 

market  operations  the  traitor  cannot,  as 
a  rule,  be  known.  Unless  his  operations 
are  of  unusual  size,  he  can  successfully 
cover  his  tracks. 

From  this  second  point  of  view, 
"They"  are  not  always  active  in  the  mar- 
ket. Great  campaigns  can  only  be  un- 
dertaken with  safety  in  periods  when  the 
future  is  to  a  certain  extent  assured.  When 
the  future  is  in  doubt,  when  various 
confusing  elements  enter  into  the  finan- 
cial and  political  situation,  leading  finan- 
ciers may  be  quite  content  to  confine 
their  stock  market  operations  to  indi- 
vidual deals,  and  to  postpone  the  inaugu- 
ration of  a  broad  campaign  until  a  more 
solid  foundation  exists  for  it. 

Third,  "They"  may  be  conceived  sim- 
ply as  speculators  and  investors  in 
general  —  all  that  miscellaneous  and 
heterogeneous  troop  of  persons,  scat- 
tered over  the  whole  world,  each  of 
whom  contributes  his  mite  to  the  fluctua- 
tions of  prices  on  the  Stock  Exchange. 
In  this  sense  there  is  no  doubt  about  the 
existence  of  Them,  and  They  are  the 


THE    STOCK   MARKET.  49 

court  of  last  resort  in  the  establishment 
of  prices.  To  put  it  another  way,  these 
are  the  "They"  who  are  the  ultimate  con- 
sumers of  securities.  It  is  to  Them  that 
everybody  else  is  planning,  sooner  or 
later,  directly  or  indirectly,  to  sell  his 
stocks. 

You  can  lead  the  horse  to  water,  but 
you  can't  make  him  drink.  You  or  I  or 
any  other  great  millionaire  can  put  up 
prices,  but  you  can't  make  Them  buy  the 
stocks  from  you,  unless  They  have  the 
purchasing  power  and  the  purchasing 
disposition.  So  there  is  no  doubt  that 
here,  at  any  rate,  we  have  a  conception 
of  Them  which  will  stand  analysis  with- 
out exploding. 

In  cases  where  a  general  campaign  is 
being  conducted,  the  "They"  theory  of 
values  is  of  considerable  help  in  the  ac- 
cumulation or  distribution  of  stocks.  In 
fact,  in  the  late  stages  of  a  bull  campaign 
the  argument  most  frequently  heard  is 
likely  to  be  something  as  follows:  "Yes, 
prices  are  high  and  I  can't  see  that  fu- 
ture prospects  are  especially  bullish — 


50  THE    PSYCHOLOGY    OF 

but  stocks  are  in  strong  hands  and  They 
will  have  to  put  them  higher  to  make 
a  market  to  sell  on."  Some  investors 
-  make  a  point  of  dumping  over  all  their 
stocks  as  soon  as  this  veteran  war-horse 
of  the  news  brigade  is  groomed  and  trot- 
ted out.  Likewise,  after  a  prolonged 
bear  campaign,  we  hear  that  somebody 
is  "in  trouble"  and  that  They  are  going 
to  break  the  market  until  certain  con- 
centrated holdings  are  brought  out. 

All  this  is  very  likely  to  be  nothing 
but  dust  thrown  in  the  eyes  of  that  most 
gullible  of  all  created  beings — the  hap- 
hazard speculator.  When  prices  are  so 
high  in  comparison  with  conditions  that 
no  sound  reason  can  be  advanced  why 
they  should  go  higher,  a  certain  number 
of  people  are  still  induced  to  buy  be- 
cause of  what  They  are  going  to  do.  Or, 
at  least,  if  the  public  can  no  longer  be 
induced  to  buy  in  any  large  volume,  it  is 
prevented  from  selling  short  for  fear  of 
what  They  may  do. 

The  close  student  of  the  technical  con- 
dition of  the  market — by  which  is  meant 


THE    STOCK    MARKET.  51 

the  character  of  the  long  and  short  inter- 
ests from  day  to  day — is  pretty  sure  to 
base  his  operations  to  a  considerable  ex- 
tent on  what  he  thinks  They  will  do 
next.  He  has  in  mind  Them  as  de- 
scribed in  the  first  classification  above — 
floor  traders,  pools  and  manipulators. 
He  gets  a  good  deal  of  help  from  this 
conception,  crude  as  it  may  appear  to 
be — largely,  no  doubt,  because  it  serves 
to  distract  his  mind  from  current  news 
and  gossip,  and  to  prevent  him  from 
being  too  greatly  influenced  by  the  mo- 
mentary appearance  of  the  market. 

When  the  market  looks  weakest,  when 
the  news  is  at  the  worst,  when  bearish 
prognostications  are  most  general,  is  the 
time  to  buy,  as  every  schoolboy  knows; 
but  if  a  man  has  in  mind  a  picture  of  a 
flood  of  stocks  pouring  out  from  the  four 
quarters  of  the  globe,  with  no  buyers, 
because  of  some  desperately  bad  news 
which  is  just  coming  over  the  ticker,  it 
is  almost  a  mental  impossibility  for  him 
to  get  up  the  courage  to  plunge  in  and 
buy.  If,  on  the  other  hand,  he  conceives 


52  THE    PSYCHOLOGY   OF 

that  They  are  just  giving  the  market  a 
final  smash  to  facilitate  covering  a  gi- 
gantic line  of  short  stocks,  he  has  cour- 
age to  buy.  His  view  may  be  right  or 
wrong,  but  at  least  he  avoids  buying  at 
the  top  and  selling  at  the  bottom,  and  he 
has  nerve  to  buy  a  weak  market  and  sell 
a  strong  one. 

The  reason  for  the  haziness  of  the 
"They"  conception  in  the  average  trad- 
er's mind  is  that  he  is  only  concerned 
with  Them  as  They  manifest  Themselves 
through  the  stock  market.  As  to  who 
They  are  he  feels  a  mild  and  detached 
curiosity ;  but  as  to  Their  manifestations 
in  the  market  he  is  vitally  and  financially 
interested.  It  is  on  the  latter  point, 
therefore,  that  he  concentrates  his 
thoughts. 

But  inasmuch  as  definite,  painstaking 
analysis  of  a  situation  is  always  better 
than  a  hazy  general  notion  of  it,  the 
trader  or  investor  would  do  much  better 
to  rid  his  mind  of  Them.  The  word 
"They"  means  nothing  until  it  has  an 
antecedent;  and  to  use  it  continually 


THE    STOCK    MARKET.  53 

without  having  any  antecedent  in  mind 
is  slipshod  language,  which  stands  for 
slipshod  thinking.  They,  in  the  sense 
of  the  big  banking  interests,  may  be 
working  directly  against  Them  in  the 
sense  of  individual  manipulators;  the 
manipulator,  again,  may  be  trying  to  trap 
Them  in  the  sense  of  floor  traders. 

A  genuine  knowledge  of  the  technical 
condition  of  the  market  cannot  be 
summed  up  in  any  offhand  declaration 
about  what  They  are  going  to  do.  You 
cannot  determine  the  attitude  toward  the 
market  of  every  individual  who  is  inter- 
ested in  it,  but  you  can  roughly  classify 
the  sources  from  which  buying  and  sell- 
ing are  likely  to  come,  the  motives  which 
are  likely  to  actuate  the  various  classes, 
and  the  character  of  the  long  interest  and 
short  interest.  In  brief,  after  enough 
study  and  observation,  you  can  always 
have  in  mind  some  kind  of  an  antecedent 
for  Them,  and  must  have  it,  if  you  base 
your  operations  on  technical  conditions 


IV — Confusing  the  Present  with 
the  Future — Discounting 

IT  is  axiomatic  that  inexperienced 
traders  and  investors,  and  indeed  a 
majority  of  the  more  experienced  as 
well,  are  continually  trying  to  speculate 
on  past  events.  Suppose,  for  example, 
railroad  earnings  as  published  are  show- 
ing constant  large  increases  in  net.  The 
novice  reasons,  "Increased  earnings  mean 
increased  amounts  applicable  to  the  pay- 
ment of  dividends.  Prices  should  rise. 
I  will  buy." 

Not  at  all.  He  should  say,  "Prices 
have  risen  to  the  extent  represented  by 
these  increased  earnings,  unless  this  ef- 
fect has  been  counterbalanced  by  other 
considerations.  Now  what  next?" 

It  is  a  sort  of  automatic  assumption  of 
the  human  mind  that  present  conditions 
will  continue,  and  our  whole  scheme  of 
life  is  necessarily  based  to  a  great  degree 


56  THE    PSYCHOLOGY   OF 

on  this  assumption.  When  the  price  of 
wheat  is  high  farmers  increase  their 
acreage  because  wheat-growing  pays 
better;  when  it  is  low  they  plant  less. 
I  remember  talking  with  a  potato-raiser 
who  claimed  that  he  had  made  a  good 
deal  of  money  by  simply  reversing  the 
above  custom.  When  potatoes  were  low 
he  had  planted  liberally;  when  high  he 
had  cut  down  his  acreage — because  he 
reasoned  that  other  farmers  would  do 
just  the  opposite. 

The  average  man  is  not  blessed — or 
cursed,  however  you  may  look  at  it — 
with  an  analytical  mind.  We  see  "as 
through  a  glass  darkly."  Our  ideas  are 
always  enveloped  in  a  haze  and  our 
reasoning  powers  work  in  a  rut  from 
which  we  find  it  painful  if  not  impossible 
to  escape.  Many  of  our  emotions  and 
some  of  our  acts  are  merely  automatic 
responses  to  external  stimuli.  Wonder- 
ful as  is  the  development  of  the  human 
brain,  it  originated  as  an  enlarged  gan- 
glion, and  its  first  response  is  still  prac- 
tically that  of  the  ganglion. 


THE    STOCK   MARKET.  57 

A  simple  illustration  of  this  is  found 
in  the  enmity  we  all  feel  toward  the  alarm 
clock  which  arouses  us  in  the  morning. 
We  have  carefully  set  and  wound  that 
alarm  and  if  it  failed  to  go  off  it  would 
perhaps  put  us  to  serious  inconvenience ; 
yet  we  reward  the  faithful  clock  with 
anathemas. 

When  a  subway  train  is  delayed  nine- 
tenths  of  the  people  waiting  on  the  plat- 
forms are  anxiously  craning  their  necks 
to  see  if  it  is  coming,  while  many  persons 
on  it  who  are  in  danger  of  missing  an 
engagement  are  holding  themselves  tense, 
apparently  in  the  effort  to  help  the  train 
along.  As  a  rule  we  apply  more  well- 
meant,  but  to  a  great  extent  ineffective, 
energy,  physical  or  nervous,  to  the  ac- 
complishment of  an  object,  than  analysis 
or  calculation. 

When  it  comes  to  so  complicated  a 
matter  as  the  price  of  stocks,  our  hazi- 
ness increases  in  proportion  to  the  dif- 
ficulty of  the  subject  and  our  ignorance 
of  it.  From  reading,  observation  and 
conversation  we  imbibe  a  miscellaneous 


58  THE   PSYCHOLOGY   OF 

assortment  of  ideas  from  which  we  con- 
clude that  the  situation  is  bullish  or 
bearish.  The  very  form  of  the  expres- 
sion "the  situation  is  bullish" — not  "the 
situation  will  soon  become  bullish" — 
shows  the  extent  to  which  we  allow  the 
present  to  obscure  the  future  in  the 
formation  of  our  judgment. 

Catch  any  trader  and  pin  him  down  to 
it  and  he  will  readily  admit  that  the 
logical  moment  for  the  highest  prices  is 
when  the  news  is  most  bullish;  yet  you 
will  find  him  buying  stocks  on  this  news 
after  it  comes  out — if  not  at  the  moment, 
at  any  rate  "on  a  reaction." 

Most  coming  events  cast  their  shadows 
before,  and  it  is  on  this  that  intelligent 
speculation  must  be  based.  The  move- 
ment of  prices  in  anticipation  of  such 
an  event  is  called  "discounting,"  and  this 
process  of  discounting  is  worthy  a  little 
careful  examination. 

The  first  point  to  be  borne  in  mind  is 
that  some  events  cannot  be  discounted, 
even  by  the  supposed  omniscience  of  the 
great  banking  interests — which  is  in 


THE    STOCK    MARKET.  59 

point  of  fact,  more  than  half  imaginary. 
The  San  Francisco  earthquake  is  the 
standard  example  of  an  event  which 
could  not  be  foreseen  and  therefore 
could  not  be  discounted;  but  an  event 
does  not  have  to  be  purely  an  "act  of 
God"  to  be  undiscountable.  There  can 
be  no  question  that  our  great  bankers 
have  been  as  much  in  the  dark  in  regard 
to  some  recent  Supreme  Court  decisions 
as  the  smallest  "piker"  in  the  customers' 
room  of  an  odd-lot  brokerage  house. 

If  the  effect  of  an  event  does  not  make 
itself  felt  before  the  event  takes  place,  it 
must  come  after.  In  all  discussion  of 
discounting  we  must  bear  this  fact  in 
mind  in  order  that  our  subject  may  not 
run  away  with  us. 

On  the  other  hand  an  event  may  some- 
times be  overdiscounted.  If  the  div- 
idend rate  on  a  stock  is  to  be  raised  from 
four  to  five  per  cent.,  earnest  bulls,  with 
an  eye  to  their  own  commitments,  may 
spread  rumors  of  six  or  seven  per  cent., 
so  that  the  actual  declaration  of  five  per 


60  THE   PSYCHOLOGY   OF 

cent,  may  be  received  as  disappointing 
and  cause  a  decline. 

Generally  speaking,  every  event  which 
is  under  the  control  of  capitalists  as- 
sociated with  the  property,  or  any  fi- 
nancial condition  which  is  subject  to  the 
management  of  combined  banking  in- 
terests, is  likely  to  be  pretty  thoroughly 
discounted  before  it  occurs.  There  is 
never  any  lack  of  capital  to  take  ad- 
vantage of  a  sure  thing,  even  though  it 
may  be  known  in  advance  to  only  a  few 
persons. 

The  extent  to  which  future  business 
conditions  are  known  to  "insiders"  is, 
however,  usually  overestimated.  So 
much  depends,  especially  in  America, 
upon  the  size  of  the  crops,  the  temper  of 
the  people,  and  the  policies  adopted  by 
leading  politicians,  that  the  future  of 
business  becomes  a  very  complicated 
problem.  No  power  can  drive  the  Ameri- 
can people.  Any  control  over  their  ac- 
tion has  to  be  exercised  by  cajolery  or 
by  devious  and  circuitous  methods. 

Moreover,  public  opinion  is  becoming 


THE    STOCK   MARKET.  61 

more  volatile  and  changeable  year  by 
year,  owing  to  the  quicker  spread  of  in- 
formation and  the  rapid  multiplication  of 
the  reading  public.  One  can  easily 
imagine  that  some  of  our  older  financiers 
must  be  saying  to  themselves,  "If  I  had 
only  had  my  present  capital  in  1870,  or 
else  had  the  conditions  of  1870  to  work 
on  today!" 

A  fair  idea  of  when  the  discounting 
process  will  be  completed  may  usually  be 
formed  by  studying  conditions  from 
every  angle.  The  great  question  is, 
when  will  the  buying  or  selling  become 
most  general  and  urgent?  In  1907,  for 
example,  the  safest  and  best  time  to  buy 
the  sound  dividend-paying  stocks  was 
on  the  Monday  following  the  bank  state- 
ment which  showed  the  greatest  decrease 
in  reserves.  The  markets  opened  down 
several  points  under  pressure  of  liquida- 
tion, and  standard  issues  never  sold  so 
low  afterward.  The  simple  explanation 
was  that  conditions  had  become  so  bad 
that  they  could  not  get  any  worse  with- 


62  THE    PSYCHOLOGY    OF 

out  utter  ruin,  which  all  parties  must  and 
did  unite  to  prevent. 

Likewise  in  the  Presidential  campaign 
of  1900,  the  lowest  prices  were  made  on 
Bryan's  nomination.  Everyone  said  at 
once,  "He  can't  be  elected."  Therefore 
his  nomination  was  the  worst  that  could 
happen— the  point  of  time  where  the 
political  news  became  most  intensely 
bearish.  As  the  campaign  developed  his 
defeat  became  more  and  more  certain, 
and  prices  continued  to  rise  in  accordance 
with  the  general  economic  and  financial 
conditions  of  the  period. 

It  is  not  the  discounting  of  an  event 
thus  known  in  advance  to  capitalists,  that 
presents  the  greatest  difficulties,  but 
cases  where  considerable  uncertainty 
exists,  so  that  even  the  clearest  mind  and 
the  most  accurate  information  can  result 
only  in  a  balancing  of  probabilities,  with 
the  scale  perhaps  inclined  to  a  greater  or 
less  degree  in  one  direction  or  the  other. 

In  some  cases  the  uncertainty  which 
precedes  such  an  event  is  more  depress- 
ing than  the  worst  that  can  happen 


THE    STOCK   MARKET.  63 

afterward.  An  example  is  a  Supreme 
Court  decision  upon  a  previously  un- 
determined public  policy  which  has  kept 
business  men  so  much  in  the  dark  that 
they  feared  to  go  ahead  with  any  im- 
portant plans.  This  was  the  case  at  the 
time  of  the  Northern  Securities  decision 
in  1904.  "Big  business"  could  easily 
enough  adjust  itself  to  either  result.  It 
was  the  uncertainty  that  was  bearish. 
Hence  the  decision  was  practically  dis- 
counted in  advance,  no  matter  what  it 
might  prove  to  be. 

This  was  not  true  to  the  same  extent 
of  the  Standard  Oil  and  American  To- 
bacco decisions  of  1911,  because  those 
decisions  were  an  earnest  of  more 
trouble  to  come.  The  decisions  were 
greeted  by  a  temporary  spurt  of  activity, 
based  on  the  theory  that  the  removal  of 
uncertainty  was  the  important  thing ;  but 
a  sensational  decline  started  soon  after 
and  was  not  checked  until  the  announce- 
ment that  the  Government  would  pros- 
ecute the  United  States  Steel  Corpora- 
tion. This  was  deemed  the  worst  that 


64  THE   PSYCHOLOGY    OF 

could  happen  for  some  time  to  come,  and 
was  followed  by  a  considerable  advance. 

More  commonly,  when  an  event  is  un- 
certain the  market  estimates  the  chances 
with  considerable  nicety.  Each  trader 
backs  his  own  opinion,  strongly  if  he 
feels  confident,  moderately  if  he  still  has 
a  few  doubts  which  he  cannot  down. 
The  result  of  these  opposing  views  may 
be  stationary  prices,  or  a  market  fluctuat- 
ing nervously  within  a  narrow  range,  or 
a  movement  in  either  direction,  greater 
or  smaller  in  proportion  to  the  more  or 
less  emphatic  preponderance  of  the  buy- 
ing or  selling. 

Of  course  it  must  always  be  remem- 
bered that  it  is  the  dollars  that  count, 
not  the  number  of  buyers  or  sellers.  A 
few  great  capitalists  having  advance  in- 
formation which  they  regard  as  accurate, 
may  more  than  counterbalance  thousands 
of  small  traders  who  hold  an  opposite 
opinion.  In  fact,  this  is  a  condition  very 
frequently  seen,  as  explained  in  a  pre- 
vious chapter. 

Even  the  operations  of  an  individual 


THE    STOCK   MARKET.  65 

investor  usually  have  an  effect  on  prices 
pretty  accurately  adjusted  to  his  opin- 
ions. When  he  believes  prices  are  low 
and  everything  favors  an  upward  move- 
ment, he  will  strain  his  resources  in 
order  to  accumulate  as  heavy  a  load  of 
securities  as  he  can  carry.  After  a  fair 
advance,  if  he  sees  the  development  of 
some  factor  which  might  cause  a  decline 
— though  he  doesn't  really  believe  it  will 
— he  thinks  it  wise  to  lighten  his  load 
somewhat  and  make  sure  of  some  of  his 
accumulated  profits.  Later  when  he 
feels  that  prices  are  "high  enough,"  he 
is  a  liberal  seller;  and  if  some  danger 
appears  while  the  level  of  quoted  values 
continues  high,  he  "cleans  house/'  to  be 
ready  for  whatever  may  come.  Then  if 
what  he  considers  an  unwarranted  specu- 
lation carries  prices  still  higher,  he  is 
very  likely  to  sell  a  few  hundred  shares 
short  by  way  of  occupying  his  capital 
and  his  mind. 

It  is,  however,  the  variation  of  opinion 
among  different  men  that  has  the  largest 
influence  in  making  the  market  responsive 


66  THE   PSYCHOLOGY   OF 

to  changing  conditions.  A  development 
which  causes  one  trader  to  lighten  his 
line  of  stocks  may  be  regarded  as  harm- 
less or  even  beneficial  by  another,  so  that 
he  maintains  his  position  or  perhaps  buys 
more.  Out  of  a  world-wide  mixture  of 
varying  ideas,  personalities  and  informa- 
tion emerges  the  average  level  of 
prices — the  true  index  number  of  in- 
vestment conditions. 

The  necessary  result  of  the  above  line 
of  reasoning  is  that  not  only  probabili- 
ties but  even  rather  remote  possibilities 
are  reflected  in  the  market.  Hardly  any 
event  can  happen  of  sufficient  importance 
to  attract  general  attention  which  some 
process  of  reasoning  cannot  construe  as 
bullish  and  some  other  process  interpret 
as  bearish.  Doubtless  even  our  old  friend 
of  the  news  columns  to  the  effect  that 
"the  necessary  activities  of  a  nation  of 
ninety  million  souls  create  and  maintain 
a  large  volume  of  business/'  may  in- 
fluence some  red-blooded  optimist  to  buy 
100  Union ;  but  the  grouchy  pessimist  who 
has  eaten  too  many  doughnuts  for  break- 


THE    STOCK   MARKET.  67 

fast  will  accept  the  statement  as  an  evi- 
dence of  the  scarcity  of  real  bull  news 
and  will  likely  enough  sell  100  Union 
short  on  the  strength  of  it. 

It  is  the  overextended  speculator  who 
causes  most  of  the  fluctuations  that  look 
absurd  to  the  sober  observer.  It  does  not 
take  much  to  make  a  man  buy  when  he 
is  short  of  stocks  "up  to  his  neck."  A 
bit  of  news  which  he  would  regard  as  in- 
significant at  any  other  time  will  then 
assume  an  exaggerated  importance  in  his 
eyes.  His  fears  increase  in  geometrical 
proportion  to  the  size  of  his  line  of 
stocks.  Likewise  the  overloaded  bull 
may  begin  to  "throw  his  stocks"  on  some 
absurd  story  of  a  war  between  Honduras 
and  Roumania,  without  even  stopping  to 
look  up  the  geographical  location  of  the 
countries  involved. 

Fluctuations  based  on  absurdities  are 
always  relatively  small.  They  are  due 
to  an  exaggerated  fear  of  what  "the 
other  fellow"  may  do.  Personally,  you 
do  not  fear  a  war  between  Honduras  and 
Ron  mania ;  but  may  not  the  rumor  be 


68  THE    PSYCHOLOGY    OF 

seized  upon  by  the  bears  as  an  excuse 
for  a  raid?  And  you  have  too  many 
stocks  to  be  comfortable  if  such  a  break 
should  occur.  Moreover,  even  if  the 
bears  do  not  raid  the  market,  will  there 
not  be  a  considerable  number  of  persons 
who,  like  yourself,  will  fear  such  a  raid, 
and  will  therefore  lighten  their  load  of 
stocks,  thus  causing  some  decline? 

The  professional  trader,  following  this 
line  of  reasoning  to  the  limit,  eventually 
comes  to  base  all  his  operations  for  short 
turns  in  the  market  not  on  the  facts  but 
on  what  he  believes  the  facts  will  cause 
others  to  do — or  more  accurately,  per- 
haps, on  what  he  sees  that  the  news  is 
causing  others  to  do;  for  such  a  trader 
is  likely  to  keep  his  finger  constantly  on 
the  pulse  of  buying  and  selling  as  it 
throbs  on  the  floor  of  the  Exchange  or 
as  recorded  on  the  tape. 

The  non-professional,  however,  will 
do  well  not  to  let  his  mind  stray  too  far 
into  the  unknown  territory  of  what  others 
may  do.  Like  the  "They"  theory  of 
values,  it  is  dangerous  ground  in  that  it 


THE    STOCK   MARKET.  69 

leads  toward  the  abdication  of  common 
sense ;  and  after  all,  others  may  not  prove 
to  be  such  fools  as  we  think  they  are. 
While  the  market  is  likely  to  discount 
even  a  possibility,  the  chances  are  very 
much  against  our  being  able  to  discount 
the  possibility  profitably. 

In  this  matter  of  discounting,  as  in 
connection  with  most  other  stock  market 
phenomena,  the  most  useful  hint  that  can 
be  given  is  to  avoid  all  efforts  to  reduce 
the  movement  of  prices  to  rules,  measures, 
or  similarities  and  to  analyze  each  case 
by  itself.  Historical  parallels  are  likely 
to  be  misleading.  Every  situation  is  new, 
though  usually  composed  of  familiar 
elements.  Each  element  must  be  weighed 
by  itself  and  the  probable  result  of  the 
combination  estimated.  In  most  cases 
the  problem  is  by  no  means  impossible, 
but  the  student  must  learn  to  look  into 
the  future  and  to  consider  the  present 
only  as  a  guide  to  the  future.  Extreme 
prices  will  come  at  the  time  when  the 
news  is  most  emphatic  and  most  widely 
disseminated.  When  that  point  is  passed 


70        PSYCHOLOGY    OF    STOCKS. 

the    question    must    always    be,    "What 
next?" 


V — Confusing  the  Personal  with 
the  General 

IN  a  previous  chapter  the  fact  has 
been   mentioned   that   one   of  the 
greatest  difficulties  encountered  by 
the  active  trader  is  that  of  keeping  his 
mind  in  a  balanced  and  unprejudiced 
condition    when    he    is    heavily    com- 
mitted to  either  the  long  or  short  side 
of  the  market.    Unconsciously  to  him- 
self,   he   permits   his   judgment   to   be 
swayed  by  his  hopes. 

A  former  large  speculator  on  the 
Chicago  Board  of  Trade,  after  being 
short  of  the  market  and  very  bearish 
on  wheat  for  a  long  time,  one  day  sur- 
prised all  his  friends  by  covering 
everything,  going  long  a  moderate 
amount,  and  arguing  violently  on  the 
bull  side.  For  two  days  he  maintained 
this  position,  but  the  market  failed  to 
go  up.  He  then  turned  back  to  the 
short  side,  and  had  even  more  bear 


72  THE    PSYCHOLOGY    OF 

arguments  at  his  tongue's  end  than  be- 
fore. 

To  a  certain  extent  he  did  this  to 
test  the  market,  but  still  more  to  test 
himself — to  see  whether,  by  changing 
front  and  taking  the  other  side,  he 
could  persuade  himself  out  of  his  bear- 
ish opinions.  When  even  this  failed 
to  make  any  real  change  in  his  views, 
he  was  reassured  and  was  ready  for 
a  new  and  more  aggressive  campaign 
on  the  short  side. 

There  is  nothing  peculiar  about  this 
condition.  While  it  is  especially  dim- 
cult  to  maintain  a  balanced  mind  in 
regard  to  commitments  in  the  markets, 
it  is  not  easy  to  do  so  about  anything 
that  closely  touches  our  personal  in- 
terests. As  a  rule  we  can  find  plenty 
of  reasons  for  doing  what  we  very 
much  want  to  do,  and  we  are  still  more 
prolific  with  excuses  for  not  doing 
what  we  don't  want  to  do.  Most  of 
us  change  the  old  sophism  "Whatever 
is,  is  right"  to  the  more  directly  use- 
ful form  "Whatever  I  want  is  right." 
To  many  readers  will  occur  at  once  the 


THE    STOCK   MARKET.  73 

name  of  a  man  prominent  in  public 
life  who  seems  very  frequently  to  act 
on  this  motto. 

If  Smith  and  Jones  have  a  verbal 
agreement,  which  afterwards  turns  out 
to  be  greatly  to  Jones'  advantage, 
Smith's  recollection  is  that  it  was 
merely  a  loose  understanding  which 
could  be  cancelled  at  any  time,  while 
Jones  remembers  it  to  have  been  a 
definite  legal  contract,  perfectly  en- 
forceable if  it  had  only  been  written. 
Talleyrand  said  that  language  was 
given  us  for  the  purpose  of  concealing 
thought.  Likewise  many  seem  to 
think  that  logic  was  given  us  for  the 
purpose  of  backing  up  our  desires. 

Few  persons  are  so  introspective  as 
to  be  able  to  tell  where  this  bias  in 
favor  of  their  own  interests  begins  and 
where  it  leaves  off.  Still  fewer  bother 
to  make  the  effort  to  tell.  To  a  great 
extent  we  train  our  judgment  to  lend 
itself  to  our  selfish  interests.  The 
question  with  us  is  not  so  much 
whether  we  have  the  facts  of  a  situa- 


74  THE   PSYCHOLOGY    OF 

tion  correctly  in  mind,  as  whether  we 
can  "put  it  over." 

When  it  comes  to  buying  and  selling 
stocks,  there  is  no  such  thing  as 
"putting  it  over."  The  market  is  re- 
lentless. It  cannot  be  budged  by  our 
sophistries.  It  will  respond  exactly  to 
the  forces  and  personalities  which  are 
working  upon  it,  with  no  more  regard 
for  our  opinions  than  if  we  couldn't 
vote.  We  cannot  work  for  our  own 
interests  as  in  other  lines  of  business— 
we  can  only  fit  our  interests  to  the 
facts. 

To  make  the  greatest  success  it  is 
necessary  for  the  trader  to  forget  en- 
tirely his  own  position  in  the  market, 
his  profits  or  losses,  the  relation  of 
present  prices  to  the  point  where  he 
bought  or  sold,  and  to  fix  his  thoughts 
upon  the  position  of  the  market.  If 
the  market  is  going  down  the  trader 
must  sell,  no  matter  whether  he  has  a 
profit  or  a  loss,  whether  he  bought  a 
year  ago  or  two  minutes  ago. 

How  far  the  average  trader  is  from 
attaining  this  point  of  view  is  quickly 


THE    STOCK   MARKET.  75 

seen  from  his  conversation,  and  it  is 
also  true  that  a  great  deal  of  the  litera- 
ture of  speculation  absolutely  fails  to 
reach  this  conception. 

"You  have  five  points  profit — you 
had  better  take  it,"  advises  the  broker. 
Perhaps  so,  if  you  know  nothing  about 
the  market ;  but  if  you  understand  the 
market  the  time  to  take  your  profit  is 
when  the  upward  movement  shows 
signs  of  culminating,  regardless  of 
your  own  deal. 

"Stop  your  losses ;  let  your  profits 
run"  is  a  saying  which  appeals  to  the 
novice  as  the  essence  of  wisdom.  But 
the  whole  question  is  where  to  stop  the 
losses  and  how  far  to  let  the  profits 
run.  In  other  words,  what  is  the  mar- 
ket going  to  do?  If  you  can  tell  this 
your  personal  losses  and  profits  will 
take  care  of  themselves^, 

Here  is  a  man  who  has  done  a  great 
deal  of  figuring  and  has  proved  to  his 
own  satisfaction  that  seven  points  is 
the  correct  profit  to  take  in  Union 
Pacific,  while  losses  should  be  limited 
to  two  and  one-half  points.  Nothing 


76  THE   PSYCHOLOGY   OF 

could  be  more  foolish  than  these  ar- 
bitrary figures.  He  is  trying  to  make 
the  market  fit  itself  around  his  own 
trades,  instead  of  adapting  his  trades 
to  the  market. 

In  any  broker's  office  you  will  notice 
that  a  large  part  of  the  talk  concerns 
the  profits  and  losses  of  the  traders. 
Brown  had  a  profit  of  ten  points  and 
then  let  it  get  away  from  him.  "Great 
Scott!"  says  his  wise  friend.  "What 
do  you  want?  Aren't  you  satisfied  with 
ten  points  profit?"  The  reply  should 
be,  though  it  rarely  is,  "Certainly  not, 
if  I  think  the  market  is  going  higher." 

"Get  them  out  with  a  small  profit," 
I  once  heard  one  broker  say  to  an- 
other. "If  you  don't  they  will  hang 
on  and  take  a  loss.  They  never  get 
profit  enough  to  satisfy  them."  A 
good  policy,  probably,  if  neither  the 
broker  nor  his  customer  had  any  real 
knowledge  of  the  market;  but  mere 
nonsense  for  the  trader  who  aims  to 
be  in  the  slightest  degree  scientific. 

The  fact 'is  that  the  more  a  trader 
allows  his  mind  to  dwell  upon  his  own 


THE    STOCK   MARKET.  77 

position  in  the  market  the  more  likely 
it  is  that  his  judgment  will  become 
warped  so  that  his  mind  is  blind  to 
those  considerations  which  do  not  fall 
in  with  his  preconceived  opinion. 

Until  you  try  it,  you  have  almost  no 
idea  of  the  extent  to  which  you  may 
be  rendered  unreasonable  by  the  mere 
fact  that  you  are  committed  to  one 
side  of  the  market.  "In  the  market, 
to  be  consistent  is  to  be  stubborn/' 
some  one  has  said;  and  it  is  true  that 
the  man  of  strong  will  and  logical  in- 
tellect is  often  less  successful  than  the 
more  shallow  and  volatile  observer, 
who  is  ready  to  whiffle  about  like  the 
weathercock  at  any  suspicion  of  a 
change  in  the  wind.  This  is  because 
the  strong  man  has  in  this  instance 
embarked  upon  an  enterprise  where 
he  cannot  use  his  natural  force  and  de- 
termination— he  can  employ  only  his 
faculties  of  observation  and  interpreta- 
tion. Yet  in  the  end  the  man  of  char- 
acter will  be  the  more  permanently 
successful,  because  he  will  eventually 


78  THE   PSYCHOLOGY   OF 

master    his    subject    more    thoroughly 
and  attain  a  more  judicial  attitude. 

The  more  simple-minded,  after  once 
committing  themselves  to  a  position, 
are  thereafter  chiefly  influenced  and 
supported  by  the  illusions  of  hope. 
They  bought,  probably,  as  a  result  of 
some  bullish  development.  If  prices 
have  advanced,  they  find  that  the  mar- 
ket "looks  strong,"  a  good  deal  of  en- 
couraging news  comes  out  on  the 
tickers,  and  they  hope  for  large  profits. 
After  five  points  in  their  favor,  they 
hope  for  ten,  and  after  ten  they  look 
for  fifteen  or  twenty. 

On  the  other  hand,  if  prices  decline 
they  charge  it  to  "manipulation,"  "bear 
raids,"  etc.,  and  expect  an  early  re- 
covery. Much  of  the  bear  news  ap- 
pears to  them  to  be  put  out  malicious- 
ly, in  order  to  cause  prices  to  decline 
further.  It  is  not  until  the  decline 
begins  to  cause  a  painful  encroach- 
ment upon  their  capital  that  they 
reach  the  point  of  saying,  "If 
'they'  can  depress  prices  like  this 
in  the  face  of  a  bullish  situation, 


THE    STOCK    MARKET.  79 

what  is  the  use  of  fighting  them?  By 
a  flood  of  short  sales,  they  can  put 
prices  down  as  much  as  they  like" — 
or  something  of  the  sort. 

Such  traders  are  suffering  merely 
from  youth,  or  lack  of  sound  business 
sense,  or  both.  They  have  a  consider- 
able period  of  study  before  them,  if 
they  persist  until  they  get  permanently 
profitable  results.  Most  of  them,  of 
course,  do  not  persist. 

A  much  more  intelligent  class,  many 
of  whom  are  properly  to  be  considered 
as  investors,  do  not  allow  their  posi- 
tion in  the  market  to  blind  them  so  far 
as  current  news  or  statistical  develop- 
ments are  concerned,  but  do  permit 
themselves  to  become  biased  in  regard 
to  the  most  important  factor  of  all — 
the  effect  of  a  change  in  the  price  level. 

They  bought  stocks  in  the  expecta- 
tion of  an  improved  situation.  The 
improved  situation  comes  and  prices 
rise.  Nothing  serious  in  the  way  of 
bear  news  appears.  On  the  con- 
trary, bull  news  continues  plentiful. 


80  THE  PSYCHOLOGY   OF 

Under  these  conditions  they  see  no 
reason  for  selling. 

Yet  there  may  be  a  most  important 
reason  for  selling — namely,  that  prices 
have  risen  sufficiently  to  counterbal- 
ance the  improved  situation — and  they 
would  see  and  appreciate  this  fact  if 
they  were  in  the  position  of  an  unin- 
terested observer. 

One  of  the  principal  reasons  why  in- 
vestors of  this  class  allow  themselves 
to  become  confused  as  to  the  influence 
of  the  price  level  is  because  a  bull 
market  nearly  always  goes  unreason- 
ably high  before  it  culminates.  The 
investor  has  perhaps,  in  several  previ- 
ous instances,  sold  out  at  what  he 
thought  was  a  fair  price  level,  only  to 
see  the  public  run  away  with  the  mar- 
ket to  a  point  where  his  profits  would 
have  been  doubled  if  he  had  held  on. 

It  is  in  such  cases  that  an  expert 
knowledge  of  speculation  is  essential. 
If  the  investor  has  not  this  knowledge, 
and  cannot  obtain  the  dependable  ad- 
vice of  one  who  has  it,  then  he  must 
content  himself  with  more  moderate 


THE   STOCK   MARKET.  81 

profits  and'  forego  the  expectation  of 
getting  the  full  benefit  of  the  advance. 
But  with  a  fair  knowledge  of  specula- 
tive influences,  he  can  fix  his  mind  on 
the  development  of  the  campaign,  re- 
gardless of  his  own  holdings,  and  can 
usually  secure  a  larger  profit  than  if 
he  depended  merely  upon  ordinary 
business  "common  sense." 

The  mistake  is  made  when,  with- 
out any  expert  knowledge  of  specula- 
tion, he  permits  himself  to  hold  on  in 
the  hope  of  higher  prices  after  a  level 
has  been  reached  which  has  fairly  dis- 
counted improved  business  conditions. 

Not  one  trader  in  a  thousand  ever 
becomes  so  expert  or  so  seasoned  as 
to  entirely  overcome  the  influence  his 
position  in  the  market  exerts  upon  his 
judgment.  That  influence  appears  in 
the  most  insidious  and  elusive  ways. 
One  of  the  principal  difficulties  of  the 
expert  is  in  preventing  his  active  im- 
agination from  causing  him  to  see 
what  he  is  looking  for  just  because  he 
is  looking  for  it. 

An   example   will   make   this   clear. 


82  THE    PSYCHOLOGY    OF 

The  expert  has  learned  from  experi- 
ence, let  us  say,  that  the  appearance 
of  "holes"  in  the  market  is  a  sign  of 
weakness.  By  a  "hole"  is  meant  a 
condition  of  the  market  where  it  sud- 
denly and  unaccountably  refuses  to 
take  stock.  A  few  hundred  shares  of 
an  active  stock  are  offered  for  sale. 
Sentiment  is  generally  bullish,  but 
there  is  no  buyer  for  that  stock.  Prices 
slip  quickly  down  half  a  point  or  a 
point  before  buyers  are  found.  This, 
in  an  active  stock,  is  unusual;  and  al- 
though the  price  may  recover,  the  pro- 
fessional does  not  forget  this  treacher- 
ous failure  of  the  market  to  accept 
moderate  offerings.  He  considers  it  a 
sign  of  an  "over-bought"  market. 

Now  suppose  the  trader  has  calcu- 
lated that  an  advance  is  about  to  cul- 
minate and  has  taken  the  short  side 
in  anticipation  of  that  event.  He  sus- 
pects that  the  market  is  over-bought, 
but  is  not  yet  sure  of  it.  Under  these 
circumstances  any  little  dip  in  the 
price  will  perhaps  look  to  him  like  a 
"hole,"  even  though  under  other  con- 


THE   STOCK   MARKET.  83 

ditions  he  would  not  notice  it  or  would 
think  nothing  about  it.  He  is  looking 
for  the  development  of  weakness  and 
there  is  danger  that  his  imagination  may 
show  him  what  he  is  looking  for  even 
though  it  isn't  there ! 

The  same  remarks  would  apply  to 
the  detection  of  accumulation  or  dis- 
tribution. If  you  want  to  see  distribu- 
tion after  a  sharp  advance,  you  are 
very  likely  to  see  it.  If  you  have  sold 
out  and  want  to  get  a  reaction  on  which 
to  repurchase,  you  will  see  plenty  of 
indications  of  a  reaction.  Indeed,  it 
is  a  sort  of  proverb  in  Wall  Street  that 
there  is  no  bear  so  bearish  as  a  sold- 
out  bull  who  wants  a  chance  to  re- 
purchase. 

In  the  study  of  so-called  "technical" 
conditions  of  the  market,  a  situation 
often  appears  which  permits  a  double 
construction.  Indications  of  various 
kinds  are  almost  evenly  balanced ;  some 
things  might  be  interpreted  in  two  dif- 
ferent ways;  and  a  trader  not  already 
interested  in  the  market  would  be  likely 


84  THE   PSYCHOLOGY    OF 

to  think  it  wise  to  stay  out  until 
he  eould  see  his  way  more  clearly. 

Under  such  circumstances  you  will 
find  it  an  almost  invariable  rule  that 
the-  man  who  was  long  before  this  con- 
dition arose  will  interpret  technical 
conditions  as  bullish,  while  the  man 
who  was  and  remains  short,  sees  plain 
indications  of  technical  weakness. 
Somewhat  amusing,  but  true. 

In  this  matter  of  allowing  the  judg- 
ment to  be  influenced  by  personal  com- 
mitments, very  little  of  a  constructive 
or  practically  helpful  nature  can  be 
written,  except  the  one  word  "Don't." 
Yet  when  the  investor  or  trader  has 
come  to  realize  that  he  is  a  prejudiced 
observer,  he  has  made  progress ;  for 
this  knowledge  keeps  him  from  trust- 
ing too  blindly  to  something  which,  at 
the  moment,  he  calls'  judgment,  but 
which  may  turn  out  to  be  simply  an 
unusually  strong  impulse  of  greed. 

It  has  often  been  noted  by  stock  mar- 
ket writers  that  since  the  great  public 
is  bearish  at  the  bottom  and  bullish  at 
the  top,  it  could  make  its  fortune  and 


THE    STOCK   MARKET.  85 

beat  the  multi-millionaires  at  their  own 
game  by  simply  reversing  itself — buy- 
ing when  it  feels  like  selling  and  selling 
when  it  feels  like  buying.  Tom  Law- 
son,  in  the  heyday  of  his  publicity, 
seems  to  have  had  some  sort  of  dream 
of  the  public  selling  back  to  Standard 
Oil  capitalists  the  stocks  which  it  had 
bought  from  them  and  thus  bringing 
everything  to  smash  in  a  heap — the 
philanthropic  Thomas,  doubtless,  being 
first  properly  short  of  the  market. 

This  wrongheadedness  of  the  public 
no  longer  exists  to  the  same  extent  as 
formerly.  A  great  number  of  small  in- 
vestors buy  and  sell  intelligently  and 
there  has  been  a  most  noticeable  falling 
off  in  the  gambling  class  of  trade — 
much  to  the  satisfaction  of  everyone, 
except,  perhaps,  the  brokers  who  form- 
erly handled  such  business. 

It  remains  true,  nevertheless,  that 
the  very  moment  when  the  market 
looks  strongest,  is  likely  to  be  near  the 
top,  and  just  when  prices  appear  to 
have  started  on  a  straight  drop  to  the 
zero  point  is  usually  near  the  bottom 


86        PSYCHOLOGY    OF    STOCKS. 

The  practical  way  for  the  investor  to 
use  this  principle  is  to  be  ready  to 
sell  at  the  moment  when  bull  sentiment 
seems  to  be  most  widely  distributed, 
and  to  buy  when  the  public  in  general 
seem  most  discouraged.  It  is  especially 
important  for  him  to  bear  this  principle 
in  mind  in  taking  profits  on  previous 
commitments,  as  his  own  interests  are 
then  identified  with  the  current  trend 
of  prices. 

In  a  word,  the  trader  or  investor  who 
has  studied  the  subject  enough  to  be 
reading  this  book,  probably  could 
not  make  profits  by  reversing  him- 
self, even  if  such  a  thing  were 
possible;  but  he  can  endeavor  to  hold 
himself  in  a  detached,  unprejudiced 
frame  of  mind,  and  to  study  the  psy- 
chology of  the  crowd,  especially  as  it 
manifests  itself  in  the  movement  of 
prices. 


VI— The  Panic  and  the  Boom 

BOTH  the  panic  and  the  boom  are 
eminently  psychological  phe- 
nomena. This  is  not  saying 
that  fundamental  conditions  do  not  at 
times  warrant  sharp  declines  in  prices 
and  at  other  times  equally  sharp  ad- 
vances. But  the  panic,  properly  so- 
called,  represents  a  decline  greater 
than  is  warranted  by  conditions,  usu- 
ally because  .of  an  excited  state  of  the 
public  mind,  accompanied  by  exhaus- 
tion of  resources;  while  the  term 
"boom"  is  used  to  mean  an  excessive 
and  largely  speculative  advance. 

There  are  some  special  features  con- 
nected with  the  panic  and  the  boom 
which  are  worthy  of  separate  consider- 
ation. 

It  is  really  astonishing  what  a  hold 
the  fear  of  a  possible  panic  has  upon 
the  minds  of  many  investors.  The 


88  THE    PSYCHOLOGY   OF 

memory  of  the  events  of  1907  has  un- 
doubtedly operated  greatly  to  lessen 
the  volume  of  speculative  trade  from 
that  time  to  the  present  (April,  1912). 
Panics  of  equal  severity  have  occurred 
only  a  few  times  in  the  entire  history 
of  the  country,  and  the  possibility  of 
such  an  outbreak  in  any  one  month  is 
smaller  than  the  chance  of  loss  on  the 
average  investment  through  the  failure 
of  the  company.  Yet  the  specter  of 
such  a  panic  rises  in  the  minds  of  the 
inexperienced  whenever  they  think  of 
buying  stocks. 

"Yes,"  the  investor  may  say,  "Read- 
ing seems  to  be  in  a  very  strong  posi- 
tion, but  look  where  it  sold  in  1907 — 
at  $70  a  share !" 

It  is  sometimes  assumed  that  the 
low  prices  in  a  panic  are  due  to  a  sud- 
den spasm  of  fear,  which  comes  quickly 
and  passes  away  quickly.  This  is  not 
the  case.  In  a  way,  the  operation  of 
the  element  of  fear  begins  when  prices 
are  near  the  top.  Some  cautious  in- 
vestors begin  to  fear  that  the  boom  is 


THE    STOCK   MARKET.  89 

being  overdone  and  that  a  disastrous 
decline  must  follow  the  excessive  spec- 
ulation for  the  rise.  They  sell  under 
the  influence  of  this  feeling. 

During  the  ensuing  decline,  which 
may  run  for  years,  more  and  more 
people  begin  to  feel  uneasy  over  busi- 
ness or  financial  conditions,  and  they 
liquidate  their  holdings.  This  caution 
or  fearfulness  gradually  spreads,  in- 
creasing and  decreasing  in  waves,  but 
growing  a  little  greater  at  each  succes- 
sive swell.  The  panic  is  not  a  sudden 
development,  but  is  the  result  of  causes 
long  accumulated. 

The  actual  bottom  prices  of  the  panic 
are  more  likely  to  result  from  necessity 
than  from  fear.  Those  investors  who 
could  be  frightened  out  of  their  hold- 
ings are  likely  to  give  up  before  the 
bottom  is  reached.  The  lowest  prices 
are  usually  made  by  sales  for  those 
whose  immediate  resources  are  ex- 
hausted. Most  of  them  are  taken  by 
surprise  and  could  raise  the  money  nec- 
essary to  carry  their  stocks  if  they  had 


90  THE   PSYCHOLOGY   OF 

a  little  time;  but  in  the  stock  market, 
"time  is  the  essence  of  the  contract," 
and  is  the  very  thing  that  they  cannot 
have. 

The  great  cause  of  loss  in  times  of 
panic  is  the  failure  of  the  investor  to 
keep  enough  of  his  capital  in  liquid 
form.  He  becomes  "tied  up"  in  various 
undertakings  so  that  he  cannot  realize 
quickly.  He  may  have  abundant  prop- 
erty, but  no  ready  money.  This  condi- 
tion, in  turn,  results  from  trying  to  do 
too  much — greed,  haste,  excessive  am- 
bition, an  oversupply  of  easy  confidence 
as  to  the  future. 

It  is  noticeable  in  panic  times  that 
a  period  arrives  when  nearly  every  one 
thinks  that  stocks  are  low  enough,  yet 
prices  continue  downward  to  a  still 
lower  level.  The  result  is  that  many 
investors,  after  thinking  that  they  have 
"loaded  up"  near  the  bottom,  find  that 
it  was  a  false  bottom,  and  are  finally 
forced  to  throw  over  their  holdings  on 
a  further  decline. 

This  is  due  to  the   fact  mentioned 


THE    STOCK    MARKET.  91 

above,  that  final  low  prices  are  the  re- 
sult of  necessities,  not  of  opinions.  In 
1907,  for  example,  every  one  of  good 
sense  knew  perfectly  well  that  stocks 
were  selling  below  their  value — the 
trouble  was  that  investors  could  not 
get  hold  of  the  money  with  which  to 
buy. 

The  moral  is  that  low  prices,  after 
a  prolonged  bear  period,  are  not  in 
themselves  a  sufficient  reason  for  buy- 
ing stocks.  The  key  to  the  situation 
lies  in  the  accumulation  of  liquid  capital, 
which  is  most  quickly  evidenced  by  a 
rapid  recovery  of  the  excess  of  deposits 
over  loans  in  the  New  York  clearing 
house  banks  (excluding  the  trust  com- 
panies, in  which  loans  are  more  varied). 
This  subject,  however,  takes  us  outside 
our  present  field. 

It  is  to  a  great  extent  because  the 
last  part  of  the  decline  in  a  panic  has 
been  caused  not  by  public  opinion,  or 
even  by  public  fear,  but  by  necessity, 
arising  from  absolute  exhaustion  of 
available  funds,  that  the  first  part  of 


92  THE   PSYCHOLOGY   OF 

the  ensuing  recovery  takes  place  with- 
out any  apparent  reason. 

Traders  say,  "The  panic  is  over,  but 
stocks  cannot  go  up  much  under  such 
bearish  conditions  as  now  exist."  Yet 
stocks  can  and  do  go  up,  because  they 
are  merely  regaining  the  natural  level 
from  which  they  were  depressed  by 
"bankrupt  sales,"  as  we  would  say  in 
discussing  dry  goods. 

Perhaps  the  word  "fear"  has  been 
overworked  in  the  discussion  of  stock 
market  psychology.  It  is  only  the  very 
few  who  actually  sell  their  stocks  un- 
der the  direct  influence  of  the  emotion 
of  fear.  But  a  feeling  of  caution  strong 
enough  to  induce  sales,  or  even  a  fixed 
belief  that  prices  must  decline,  con- 
stitutes in  itself  a  sort  of  modification 
of  fear,  and  has  the  same  result  so  far 
as  prices  are  concerned. 

The  effect  of  this  fear  or  caution  in  a 
panic  is  not  limited  to  the  selling  of 
stocks,  but  is  even  more  important  in 
preventing  purchases.  It  takes  far  less 
uneasiness  to  cause  the  intending  in- 


THE   STOCK   MARKET.  93 

vestor  to  delay  purchases  than  to  pre- 
cipitate actual  sales  by  holders.  For 
this  reason,  a  small  quantity  of  stock 
pressed  for  sale  in  a  panicky  market 
may  cause  a  decline  out  of  all  propor- 
tion to  its  importance.  The  offerings 
may  be  small,  but  nobody  wants  them. 

It  is  this  factor  which  accounts  for 
the  rapid  recoveries  which  frequently 
follow  panics.  Waiting  investors  are 
afraid  to  step  in  front  of  a  demoralized 
market,  but  once  the  turn  appears,  they 
fall  over  each  other  to  buy. 

The  boom  is  in  many  ways  the  re- 
verse of  the  panic.  Just  as  fear  keeps 
growing  and  spreading  until  the  final 
crash,  so  confidence  and  enthusiasm 
keep  reproducing  each  other  on  a  wider 
and  wider  scale  until  the  result  is  a 
sort  of  hilarity  on  the  part  of  thousands 
of  men,  many  of  them  comparatively 
young  and  inexperienced,  who  have 
"made  big  money"  during  the  long  ad- 
vance in  prices. 

These  imaginary  millionaires  appear 
in  a  small  swarm  during  every  pro- 


94  THE    PSYCHOLOGY    OF 

longed  bull  market,  only  to  fall  with 
their  wings  singed  as  soon  as  prices 
decline.  Such  speculators  are,  to  all 
practical  intents  and  purposes,  irrespon- 
sible. It  is  their  very  irresponsibility 
which  has  enabled  them  to  make  money 
so  rapidly  on  advancing  prices.  The 
prudent  man  gets  only  moderate  profits 
in  a  bull  market — it  is  the  man  who 
trades  on  "shoe-string  margins"  who 
gets  the  biggest  benefit  out  of  the  rise. 
k  When  such,  mushroom  fortunes  have 
accumulated,,  the  market  may  fall  tem- 
porarily into  the  hands  of  these  dare- 
devil spirits,  so  that  almost  any  reck- 
lessness is  possible  for  the  time.  It  is 
this  kind  of  buying  which  causes  prices 
to  go  higher  after  they  are  already  high 
enough — just  as  they  go  lower  in  a 
panic  after  they  are  plainly  seen  to  be 
low  enough. 

When  prices  get  above  the  natural 
level,  a  well-judged  short  interest  be- 
gins to  appear.  These  shorts  are  right, 
but  right  too  soon.  In  a  genuine  bull 
market  they  are  nearly  always  driven 


THE    STOCK   MARKET.  95 

to  cover  by  a  further  rise,  which  is, 
from  any  common  sense  standpoint,  un- 
reasonable. A  riot  of  pyramided  mar- 
gins drives  the  sane  and  calculating 
short  seller  temporarily  to  shelter. 

A  psychological  influence  of  a  much 
wider  scope  also  operates  to  help  a  bull 
market  along  to  unreasonable  heights. 
Such  a  market  is  usually  accompanied 
by  rising  prices  in  all  lines  of  business 
and  these  rising  prices  always  create, 
in  the  minds  of  business  men,  the  im- 
pression that  their  various  enterprises 
are  more  profitable  than  is  really  the 
case. 

One  reason  for  this  false  impression 
is  found  in  stocks  of  goods  on  hand. 
Take  the  wholesale  grocer,  for  ex- 
ample, carrying  a  stock  of  goods  which 
inventories  $10,000  in  January,  1909. 
On  that  date  Bradstreet's  index  of  com- 
modity prices  stood  at  8.26.  In  Jan- 
uary, 1910,  Bradstreet's  index  was  9.23. 
If  the  prices  of  the  various  articles  in- 
cluded in  this  stock  of  groceries  in- 
creased in  the  same  ratio  as  Brad- 


96  THE   PSYCHOLOGY   OF 

street's  list,  and  if  the  grocer  had  on 
hand  exactly  the  same  things,  he  would 
inventory  them  at  about  $11,168  in 
January,  1910. 

He  made  an  additional  profit  of 
$1,168  during  the  year  without  any  ef- 
fort, and  probably  without  any  calcu- 
lation, on  his  part.  But  this  profit  was 
only  apparent,  not  real;  for  he  could 
not  buy  any  more  with  the  $11,168  in 
January,  1910,  than  he  could  have 
bought  with  the  $10,000  in  January, 
1909.  He  is  deceived  into  supposing 
himself  richer  than  he  really  is,  and 
this  false  idea  leads  to  a  gradual 
growth  of  extravagance  and  specula- 
tion in  every  line  of  business  and  every 
walk  of  life. 

•  The  secondary  results  of  this  delu- 
sion of  increased  wealth  because  of  ris- 
ing prices,  are  even  more  important 
than  the  primary  results.  Our  grocer, 
for  example,  decides  to  spend  this 
$1,168  for  an  automobile.  This  helps 
the  automobile  business.  Hundreds  of 
similar  orders  induce  the  automobile 


THE    STOCK    MARKET.  97 

company  to  enlarge  its  plant.  This 
means  extensive  purchases  of  material 
and  employment  of  labor.  The  in- 
creased demand  resulting  from  a  sim- 
ilar condition  of  things  in  all  depart- 
ments of  industry  produces,  if  other 
conditions  are  favorable,  a  still  further 
rise  in  prices;  hence  at  the  end  of  an- 
other year  the  grocer  perhaps  has  an- 
other imaginary  profit,  which  he 
spends  in  enlarging  his  residence  or 
buying  new  furniture,  etc. 

The  stock  market  feels  the  reflection 
of  all  this  increased  business  and 
higher  prices.  Yet  the  whole  thing  is 
psychological,  and  sooner  or  later  our 
grocer  must  earn  and  save,  by  hard 
work,  economical  living  and  shrewd 
calculation,  the  amount  he  has  paid  for 
his  automobile  or  furniture. 

Again,  rising  stock  prices  and  rising 
commodity  prices  react  on  each  other. 
If  the  grocer,  in  addition  to  his  im- 
aginary profit  of  $1,168  sees  a  ten  per 
cent,  advance  in  the  prices  of  various 
securities  which  he  holds  for  invest- 


98  THE    PSYCHOLOGY   OF 

ment,  he  is  encouraged  to  still  larger 
expenditures;  and  likewise  if  the  capi- 
talist notes  a  ten  per  cent,  advance  in 
the  stock  market,  he  perhaps  employs 
additional  servants  and  enlarges  his 
household  expenditures  so  that  he  buys 
more  groceries.  Thus  the  feeling  of 
confidence  and  enthusiasm  spreads 
wider  and  wider  like  ripples  from  a 
stone  dropped  into  a  pond.  And  all  of 
these  developments  are  faithfully  re- 
flected by  the  stock  market  barometer. 
The  result  is  that,  in  a  year  like  1902 
or  1906,  the  high  prices  for  stocks  and 
the  feverish  activity  of  general  trade 
are  based,  to  an  entirely  unsuspected 
extent,  on  a  sort  of  pyramid  of  mis- 
taken impressions,  most  of  which  may 
be  traced,  directly  or  indirectly,  to  the 
fact  that  we  measure  everything  in 
money  and  always  think  of  this  money- 
measure  as  fixed  and  unchangeable, 
while  in  reality  our  money  fluctuates 
in  value  just  like  iron,  potatoes,  or 
"Fruit  of  the  Loom."  We  are  accus- 
tomed to  figuring  the  money-value  of 


THE    STOCK    MARKET.  99 

wheat,  but  we  get  a  headache  when  we 
try  to  reckon  the  wheat-value  of 
money. 

When  a  fictitious  situation  like  this 
begins  to  go  to  pieces,  the  stock  mar- 
ket, fulfilling  its  function  of  barometer, 
declines  first,  while  general  business 
continues  active.  Then  the  "money 
sharks  of  Wall  Street"  get  themselves 
roundly  cursed  by  the  public  and  there 
is  a  widespread  desire  to  wipe  them  off 
the  earth  in  summary  fashion.  The 
stock  market  never  finds  itself  popular 
unless  it  is  going  up;  yet  its  going 
down  undoubtedly  does  far  more  to 
promote  the  country's  welfare  in  the 
long  run,  for  it  serves  to  temper  the 
crash  which  must  eventually  come  in 
general  business  circles  and  to  fore- 
warn us  of  trouble  ahead  so  that  we 
may  prepare  for  it. 

It  is  generally  more  difficult  to  dis- 
tinguish the  end  of  a  stock  market 
boom  than  to  decide  when  a  panic  is 
definitely  over.  The  principle  of  tfie 
thing  is  simple  enough,  however.  It 


100       PSYCHOLOGY  OF  STOCKS. 

was  an  oversupply  of  liquid  capital  that 
started  the  market  upward  after  the 
panic  was  over.  Similarly  it  is  exhaus- 
tion of  liquid  capital  which  brings  the 
bull  movement  to  an  end.  This  ex- 
haustion is  shown  by  higher  call  money 
rates,  loss  of  the  excess  of  deposits  over 
loans  in  New  York  clearinghouse 
banks,  a  steady  rise  in  commercial  pa- 
per rates,  and  a  sagging  market  for 
high-grade  bonds. 


VII— The  Psychology  of  Scale 
Orders 

THE  observer  of  market  conditions 
soon  comes  to  know  that  there 
are  two  general  classes  of  minds 
whose     operations     are     reflected     in 
prices.    These  classes  might  be  named 
the  "impulsive"  and  the  "phlegmatic." 
The    "impulsive"    operator    says,    for 
example,     "Conditions,     both     funda- 
mental and  technical,  warrant  higher 
prices.    Stocks  are  a  purchase."    Hav- 
ing formed  this  conclusion,  he  proceeds 
to  buy.     He  does  not  try  or  expect  to 
buy   at   the   bottom.     On   the   contrary 
he  is  perfectly  willing  to  buy  at  the  top 
so  far,  provided  he  sees  prospects  of  a 
further    advance.     When    he    concludes 
that  conditions  have  turned  bearish,  or 
that  the  advance  in  prices  has  overdis- 
counted  previous  conditions,  he  sells  out. 
The  "phlegmatic"  type  of  investor, 


102  THE   PSYCHOLOGY   OF 

on  the  other  hand,  can  hardly  ever  be 
persuaded  to  buy  on  an  advance.  He 
reasons,  "Prices  frequently  move  sev- 
eral points  against  conditions,  or  at 
least  against  what  the  conditions  seem 
to  me  to  be.  The  sensible  thing  for  me 
to  do  is  to  take  advantage  of  these  con- 
trary movements." 

Hence  when  he  believes  stocks 
should  be  bought  he  places  an  order 
to  buy  on  a  scale.  His  thought  is : 

"It  seems  to  me  stocks  should  ad- 
vance from  these  prices,  but  I  am  not 
a  soothsayer,  and  prices  have  often 
declined  three  points  when  I  felt  just 
as  bullish  as  I  do  now.  So  I  will  place 
orders  to  buy  every  half  point  down 
for  three  points.  These  speculators 
are  a  crazy  lot  and  there  is  no  know- 
ing what  passing  breeze  might  strike 
them  that  would  cause  a  temporary  de- 
cline of  a  few  points." 

Among  large  capitalists,  and  espe- 
cially in  the  banking  community,  the 
"phlegmatic"  type  naturally  predom- 
inates. Such  men  have  neither  the 


THE    STOCK    MARKET.  103 

time  nor  the  disposition  to  watch  the 
ticker  closely  and  they  nearly  always 
disclaim  any  ability  to  predict  the 
smaller  movements  of  prices.  They 
are  entirely  ready,  nevertheless,  to  take 
advantage  of  these  small  fluctuations 
when  they  occur,  and  having  plenty  of 
capital,  they  can  easily  accomplish  this 
by  buying  or  selling  on  a  scale. 

As  a  matter  of  fact,  the  market  is 
usually  full  of  scale  orders,  and  the 
knowledge  of  this  and  of  the  way  in 
which  such  orders  are  handled  is  de- 
cidedly helpful  in  judging  the  tone  and 
technical  position  of  the  market  from 
day  to  day. 

The  two  types  of  operators  above 
described  are  always  working  against 
each  other.  The  buying  or  selling  of 
the  "impulsive"  trader  tends  to  force 
prices  up  or  down,  while  the  scale  or- 
ders of  the  "phlegmatic"  class  tend  to 
oppose  any  movement. 

For  example,  let  us  suppose  that 
banking  interests  believe  conditions  to 
be  fundamentally  sound  and  that  the 


104  THE   PSYCHOLOGY    OF 

general  trend  of  the  market  will  be  up- 
ward for  some  time  to  come.  Orders 
are  therefore  placed  by  various  per- 
sons to  buy  stocks  every  point  down, 
or  every  half,  quarter,  or  even  eighth 
point  down. 

On  the  other  hand,  the  active  floor 
traders  find  that,  owing  to  some  tem- 
porary unfavorable  development,  a  fol- 
lowing can  be  obtained  on  the  bear 
side.  They  perceive  the  presence  of 
scale  orders,  but  they  think  stocks  enough 
will  come  out  on  the  decline  to  fill  the 
scale  orders  and  leave  a  balance  over. 

To  put  it  another  way,  the  floating 
supply  of  stocks  has  become,  at  the 
moment,  larger  than  can  comfortably 
be  tossed  about  from  hand  to  hand  by 
the  in-and-out  class  of  traders.  The 
market  must  decline  until  a  part  of  this 
floating  supply  is  absorbed  by  the  scale 
orders  which  underlie  current  prices. 

These  conditions  produce  what  is 
commonly  called  a  "reaction."  Once 
this  surplus  floating  supply  of  stocks 
is  absorbed  by  standing  orders,  the 


THE  STOCK  MARKET.  105 

market  is  ready  to  start  upward  again. 
If  the  general  trend  is  upward,  far  less 
resistance  will  be  encountered  on  the 
advance  than  was  met  on  the  reaction ; 
hence  prices  rise  to  a  new  high  level. 
Then  profit-taking  sales  will  be  met, 
on  limited  or  scale  orders  at  various 
prices,  and  as  the  market  advances  the 
floating  supply  will  gradually  increase 
until  it  again  becomes  unwieldy  and 
another  reaction  is  necessary. 

Eventually  a  level  is  reached,  or 
some  change  in  conditions  appears, 
which  causes  these  scale  buying  orders 
to  be  partially  or  entirely  withdrawn, 
and  selling  orders  to  be  substituted  on 
a  scale  up.  The  bull  market  will  not 
go  much  further  after  this  change 
takes  place.  It  has  now  become  easier 
to  produce  declines  than  advances. 
The  situation  is  the  reverse  of  that  de- 
scribed above,  and  a  bear  market  follows. 

Commonly* there  is  a  considerable 
period  around  top  prices  when  scale 
buying  orders  are  still  found  on  de- 
clines, but  profit-taking  sales  are  also 


106          THE  PSYCHOLOGY  OF 

met  on  advances,  so  that  the  market  is 
kept  fluctuating  within  comparatively 
narrow  limits  for  a  month  or  more.  In 
fact,  it  is  likely  to  be  kept  on  this  level 
so  long  as  public  buying  continues 
greater  than  public  selling.  This  is 
sometimes  called  "distribution."  A 
similar  period  of  "accumulation"  often 
occurs  after  a  bear  market  has  run  its 
course,  and  before  any  important  ad- 
vance appears. 

A  close  watch  of  transactions,  or  a 
study  of  continuous  quotations  as  pub- 
lished in  certain  newspapers,  often  en- 
ables the  experienced  trader  to  discover 
when  the  most  important  of  these  scale 
orders  are  withdrawn  or  reversed. 

A  bull  market  which  is  full  of  scale 
buying  orders  encounters  "support/' 
so-called,  on  declines.  Bears  are  timid 
about  driving  down  prices,  because 
they  are  continually  "losing  their 
stocks."  They  say  that  "very  little 
stock  comes  out  on  declines";  hence 
there  is  a  certain  appearance  of  caution 
in  the  way  the  market  goes  down,  and 


THE    STOCK   MARKET.  107 

the  activity  of  trade  shows,  in  a  broad 
way,  a  falling  off  at  lower  prices.  On 
the  advances,  however,  a  following  is 
obtained  and  activity  increases. 

Toward  the  end  of  the  bull  market 
a  change  is  noticeable.  Prices  go 
down  easily  and  on  larger  transactions, 
while  advances  are  sluggish  and  oppo- 
sition is  met  at  higher  levels  where 
profit-taking  orders  have  been  placed. 
The  very  day  when  scale  buying  or- 
ders in  a  stock  are  withdrawn  can 
oftentimes  be  distinguished. 

In  a  bear  market,  "pressure"  appears 
in  place  of  "support."  The  scale  or- 
ders are  mostly  to  sell  as  the  market 
rises.  Only  a  small  following  of  pur- 
chasers is  obtainable  on  advances, 
hence  the  activity  of  business,  in  a  gen- 
eral way,  falls  off  as  prices  go  up. 
The  end  of  the  bear  market  is  marked 
by  the  reappearance  of  "support"  and 
the  removal  of  "pressure,"  so  that 
prices  rebound  quickly  and  sharply 
from  declines. 

The  common  assumption  is  that  this 


108       PSYCHOLOGY  OF  STOCKS. 

"support"  or  "pressure"  is  supplied  by 
"manipulators."  But  it  is  quite  as 
likely  to  result  from  the  scale  opera- 
tions of  hundreds  of  different  persons, 
whose  mental  make-up  prevents  them 
from  buying  or  selling  in  the  "im- 
pulsive" way. 


VIII— The  Mental  Attitude  of  the 
Individual 

IN  previous  chapters  we  have  seen 
that  many,  if  not  most,  of  the  ec- 
centricities of  speculative  markets, 
commonly  charged  to  manipulation, 
are  in  fact  due  to  the  peculiar  psycholog- 
ical conditions  which  surround  such 
markets.  Especially,  and  more  than  all 
else  together,  these  erratic  fluctuations 
are  the  result  of  the  efforts  of  traders 
to  operate,  not  on  the  basis  of  facts, 
nor  on  their  own  judgment  as  to  the 
effect  of  facts  on  prices,  but  on  what 
they  believe  will  be  the  probable  effect 
of  facts  or  rumors  on  the  minds  of 
other  traders.  This  mental  attitude 
opens  up  a  broad  field  of  conjecture, 
which  is  not  limited  by  any  definite 
boundaries  of  fact  or  common  sense. 

Yet  it  would  be  foolish  to  assert  that 
assuming  a  position  in  the  market 
based  on  what  others  will  do  is  a  wrong 


110  THE   PSYCHOLOGY   OF 

attitude.  It  is  confusing  to  the  uniniti- 
ated, and  first  efforts  to  work  on  such 
a  plan  are  almost  certain  to  be  disas- 
trous ;  but  for  the  experienced  it  be- 
comes a  successful,  though  of  course 
never  a  certain,  method.  A  child's  first 
efforts  to  use  a  sharp  tool  are  likely  to 
result  in  bloodshed,  but  the  same  tool 
may  trace  an  exquisite  carving  in  the 
hands  of  an  expert. 

What,  then,  should  be  the  mental  at- 
titude of  the  intelligent  buyer  and 
seller  of  securities? 

The  "long  pull"  investor,  buying  out- 
right for  cash  and  holding  for  a  liberal 
profit,  need  only  consider  this  matter 
enough  to  guard  against  becoming  con- 
fused by  the  vagaries  of  public  senti- 
ment or  by  his  own  inverted  reasoning 
processes.  He  will  get  the  best  results 
by  keeping  his  eye  single  to  two  things : 
Facts  and  Prices.  The  current  rate  of 
interest,  the  earning  power  of  the  cor- 
porations whose  stocks  he  buys,  the 
development  of  political  conditions  as 
affecting  invested  capital,  and  the  re- 


THE    STOCK   MARKET.  Ill 

lation  of  current  prices  to  the  situation 
as  shown  by  these  three  factors — these 
constitute  the  most  important  food  for 
his  mind  to  work  upon. 

When  he  finds  himself  wandering  off 
into  a  consideration  of  what  "They" 
will  do  next,  or  what  effect  such  and 
such  events  may  have  on  the  sentiment 
of  speculators,  he  cannot  do  better 
than  to  bring  himself  up  with  a  short 
turn  and  sternly  bid  himself  "Back  to 
common  sense." 

For  the  more  active  trader  the  situa- 
tion is  different.  He  need  not  be  en- 
tirely unregardful  of  values  or  funda- 
mental conditions,  but  his  prime  object 
is  to  "go  with  the  tide."  That  means 
basing  his  operations  to  a  great  extent 
on  what  others  will  think  and  do.  His 
own  mental  attitute,  then,  is  a  most  im- 
portant part  of  his  equipment  for 
success. 

First,  the  trader  must  be  a  reasoning 
optimist.  A  more  horrible  fate  can 
scarcely  be  imagined  than  the  shallow 
pessimism  of  many  market  habitues, 
whose  minds,  incapable  of  grasping  the 


112  THE    PSYCHOLOGY   OF 

larger  forces  beneath  the  movements 
of  prices,  take  refuge  in  a  cynical  dis- 
belief in  pretty  much  everything  that 
makes  life  worth  living. 

Owing  to  the  nature  of  the  business, 
however,  this  optimism  must  be  of  a 
somewhat  different  character  from  that 
which  brings  success  in  other  lines.  As 
a  general  thing  optimism  includes  the 
persistent  nourishing  of  hope,  an  ag- 
gressive confidence,  the  certainty  that 
you  are  right,  a  firm  determination  to 
accomplish  your  end.  But  you  cannot 
make  the  stock  market  move  your  way 
by  believing  that  it  will  do  so.  Here 
is  one  case,  at  any  rate,  where  New 
Thought  methods  cannot  be  directly 
applied. 

In  the  market  you  are  nothing  but 
a  chip  on  the  tide  of  events.  Optimism, 
then,  must  consist  in  believing,  not 
that  the  tide  will  continually  flow  your 
way,  but  that  you  will  succeed  in  float- 
ing with  the  tide.  Your  optimism  must 
be,  in  a  sense,  of  the  intellect,  not  of 
the  will.  An  optimism  based  on  deter- 


THE    STOCK   MARKET.  113 

mination  would,  in  this  case,  amount 
to  stubbornness. 

Another  quality  that  makes  for  suc- 
cess in  nearly  every  line  of  business  is 
enthusiasm.  For  this  you  have  abso- 
lutely no  use  in  the  stock  market.  The 
moment  you  permit  yourself  to  become 
enthusiastic,  you  are  subordinating 
your  reasoning  powers  to  your  beliefs 
or  desires. 

Enthusiasm  helps  you  influence  other 
men's  minds,  but  in  the  market  you  do 
not  desire  to  do  this  (unless  you  hap- 
pen to  be  a  big  bull  leader).  You  wish 
to  keep  your  mind  as  clear,  cool  and 
unruffled  as  the  surface  of  a  mountain 
lake  on  a  calm  day.  Any  emotion — en- 
thusiasm, fear,  anger,  depression — will 
only  cloud  the  intellect. 

Doubtless  it  would  be  axiomatic  to 
warn  the  trader  against  stubbornness. 
It  cannot  be  assumed  that  any  operator 
would  consciously  permit  himself  to 
become  stubborn.  The  trouble  arises 
in  drawing  the  line  between,  on  the 
one  hand,  persistence,  consistence,  pur- 


114  THE   PSYCHOLOGY   OF 

suit  of  a  definite  plan  until  conditions 
change;  and,  on  the  other,  stubborn  ad- 
herence to  a  course  of  action  which 
subsequent  events  have  proved  to  be 
erroneous. 

A  day  in  the  country,  with  the  mar- 
ket forgotten,  or  if  necessary  forcibly 
ejected  from  the  thoughts,  will  often 
enable  the  trader  to  return  with  a  clari- 
fied mind,  so  that  he  can  then  intelligent- 
ly convict  or  acquit  himself  of  the  vice  of 
stubbornness.  Sometimes  it  may  be- 
come necessary  to  close  all  commit- 
ments and  remain  out  of  the  market 
for  a  few  days. 

One  of  the  most  common  errors 
might  be  described  as  "getting  a  no- 
tion." This  is  due  to  the  failure  or  in- 
ability of  the  trader  to  take  a  broad 
view  of  the  entire  situation.  Some 
particular  point  in  the  complex  condi- 
tions which  usually  control  prices,  ap- 
peals to  him  strongly  and  impresses 
him  as  certain  to  have  its  effect  on  the 
market.  He  acts  on  this  single  idea, 
The  idea  may  be  all  right,  but  other 


THE    STOCK    MARKET.  115 

counterbalancing  factors  may  prevent 
it  from  having  its  natural  effect. 

You  encounter  these  "notions"  every 
day  in  the  Street.  You  meet  a  highly 
conservative  individual  and  ask  him 
what  he  thinks  of  the  situation.  "I  am 
alarmed  at  the  rapid  spread  of  radical 
sentiment/'  he  replies.  "How  can  we 
expect  capital  to  branch  out  into  new 
enterprises  when  the  profits  may  be 
swept  away  at  any  moment  by  social- 
istic legislation?" 

You  say  mildly  that  the  crops  are 
good,  the  banking  situation  sound,  bus- 
iness active,  etc.  But  all  this  produces 
no  impression  upon  him.  He  has  sold 
all  his  stocks  and  has  his  money  in  the 
banks.  (He  is  also  short  a  consider- 
able line,  but  he  doesn't  tell  you  this). 
He  will  not  buy  again  until  the  public 
becomes  "sane." 

The  next  man  you  talk  with  says: 
"We  cannot  have  much  decline  with 
the  present  good  crop  prospect.  Crops 
lie  at  the  basis  of  everything.  With 
nine  billions  of  new  wealth  coming  out 


116  THE   PSYCHOLOGY   OF 

of  the  ground  and  flowing  into  the 
channels  of  trade,  we  are  bound  to 
have  prosperous  conditions  for  some 
time  to  come." 

You  speak  of  radicalism,  adverse  leg- 
islation, high  cost  of  living,  etc.;  but 
he  thinks  these  are  relatively  unim- 
portant compared  with  that  $9,000,- 
000,000  of  new  wealth.  Of  course,  he 
is  long  of  stocks. 

"To  make  the  worse  appear  the  bet- 
ter reason,"  said  Mr.  Socrates,  some 
little  time  ago.  It  is  too  bad  we  can't 
have  Socrates'  comments  on  Wall 
Street.  The  Socratic  method  applied 
to  the  average  speculator  would  pro- 
duce amusing  results. 

Beware  of  saying,  "This  is  the  most 
important  factor  in  the  situation,"  un- 
less the  action  of  the  market  shows 
that  others  agree  with  you.  Every 
human  mind  has  its  own  peculiarities, 
so  presumably  yours  has,  though  you 
can't  see  them  plainly;  but  the  stock 
market  is  the  meeting  of  many  minds, 
having  every  imaginable  peculiarity. 


THE    STOCK   MARKET.  117 

However  important  some  single  factor 
in  the  situation  may  appear  to  you,  it 
is  not  going  to  control  the  movement 
of  prices  regardless  of  everything  else. 

An  exaggerated  example  of  "getting 
a  notion"  is  seen  in  the  so-called 
"hunch."  This  term  appears  to  mean, 
when  it  means  anything,  a  sort  of  sud- 
den welling  up  of  instinct  so  strong  as 
to  induce  the  trader  to  follow  it  regard- 
less of  reason.  In  many  cases,  the 
"hunch"  is  nothing  more  than  a  strong 
impulse. 

Almost  any  business  man  will  say 
at  times,  "I  have  a  feeling  that  we 
ought  not  to  do  this,"  or  "Somehow  I 
don't  like  that  proposition,"  without 
being  able  to  explain  clearly  the 
grounds  for  his  opposition.  Likewise  the 
"hunch"  of  a  man  who  has  watched 
the  stock  market  for  half  a  lifetime 
may  not  be  without  value.  In  such  a 
case  it  doubtless  represents  an  accu- 
mulation of  small  indications,  each  so 
trifling  or  so  evasive  that  the  trader 


118  THE   PSYCHOLOGY   OF 

cannot  clearly  marshal  and  review 
them  even  in  his  own  mind. 

Only  the  experienced  trader  is  en- 
titled to  a  "hunch."  The  novice,  or  the 
man  who  is  not  closely  in  touch  with 
technical  conditions,  is  merely  making 
an  unusual  ass  of  himself  when  he 
talks  about  a  "hunch." 

The  successful  trader  gradually 
learns  to  study  his  own  psychological 
characteristics  and  allow  to  some  ex- 
tent for  his  customary  errors  of  judg- 
ment. If  he  finds  that  he  is  generally 
too  hasty  in  reaching  a  conclusion,  he 
learns  to  wait  and  reflect  further. 
After  making  his  decision,  he  with- 
draws it  and  lays  it  up  on  a  shelf  to 
ripen.  He  makes  only  a  part  of  his  full 
commitment  at  the  moment  when  he 
feels  most  confident,  holding  the  re- 
mainder in  reserve. 

If  he  finds  that  he  is  usually  over- 
cautious, he  eventually  learns  to  be  a 
little  more  daring,  to  buy  a  part  of  his 
line  while  his  mind  is  still  partially  en- 
veloped in  the  mists  of  doubt. 


THE    STOCK   MARKET.  119 

Most  of  the  practical  suggestions 
which  can  be  offered  are  necessarily  of 
a  somewhat  negative  character.  We 
.can  point  out  the  errors  to  be  avoided 
much  more  successfully  than  we  can 
lay  out  a  course  of  positive  action.  But 
the  following  summary  may  be  useful 
to  the  active  trader: 

(1)  Your  main  purpose  must  be  to 
keep  the  mind  clear  and  well  balanced. 
Hence,  do  not  act  hastily  on  apparently 
sensational  information;  do  not  trade 
so  heavily  as  to  become  anxious ;  and 
do  not  permit  yourself  to  be  influenced 
by  your  position  in  the  market. 

(2)  Act  on  your  own  judgment,  or 
else  act  absolutely  and  entirely  on  the 
judgment    of    another,    regardless    of 
your  own  opinion.     "Too  many  cooks 
spoil  the  broth." 

(3)  When  in  doubt,  keep  out  of  the 
market.     Delays  cost  less  than  losses. 

(4)  Endeavor  to  catch  the  trend  of 
sentiment.    Even  if  this  should  be  tem- 
porarily   against    fundamental    condi- 


120      PSYCHOLOGY  OF  STOCKS. 

tions,  it  is  nevertheless  unprofitable  to 
oppose  it. 

(5)  The  greatest  fault  of  ninety-nine 
out  of  one  hundred  active  traders  is 
being  bullish  at  high  prices  and  bear- 
ish at  low  prices.  Therefore,  refuse  to 
follow  the  market  beyond  what  you 
consider  a  reasonable  climax,  no  mat- 
ter how  large  the  possible  profits  that 
you  may  appear  to  be  losing  by  inac- 
tion. 

The  field  covered  by  these  chapters 
is  to  a  great  extent  new.  As  it  be- 
comes more  thoroughly  cultivated,  it 
may  be  possible  to  speak  with  more 
scientific  definiteness.  In  the  mean- 
time, the  author  hopes  that  his  com- 
ments and  suggestions  may  be  of  some 
service  in  helping  readers  to  avoid  un- 
wise risks  and  to  apply  sound  prin- 
ciples of  analysis  to  the  investment  or 
speculative  situation. 


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cents.  Bound  in  extra  cloth. 

Price,  $1.00  net ;    $1.45  postpaid 

THE  TICKER  PUBLISHING  CO. 

2  Rector  Street,  New  York 


14  DAY  USE 

FROM  WHICH  BORROWED 


YA  06445 


U.  C.  BERKELEY  LIBRARIES 


